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Law Office of Marilyn Sullivan

Occupier FAQs

This page was revised May 2016.

Q: How is the down payment split by the parties?

A: In the traditional Investor-Occupier transaction, the typical split is Investor pays 17% of the purchase price while the Occupier pays 3%. The loan is 80%. In the other transaction types, the parties usually evenly split down payments and expenses.

Q: What are the Occupier's responsibilities and benefits?

A: The Occupier is responsible for taxes, mortgage, capital improvements and any expenses associated with operating the home. The key benefit for the Occupier is the down payment. The Occupier receives most of the down payment from an Investor which makes high-priced real estate more affordable.

Q: Does the Occupier have to live in the home during the equity share?

A: Yes, but if a situation arises where the Occupier can not, the model Equity Sharing Agreement allows it to be rented with the Investor's consent.

Q: Who pays the closing costs?

A: Since the Occupier receives full occupancy of the home, the Occupier pays the closing costs and is not reimbursed (other than by tax credits). The Occupier also pays them at sale if he or she decides to move instead of buying out the Investor.

Q: Can I see what my transaction will look like?

A: Yes, the Equity Share Calculator™, available through our Products page, lets you project all financial details so you can see what a typical transaction looks like from beginning to end, including tax deductions.

Q: The Equity Share Calculator™ asks for the property appreciation rate. How do I know this?

A: When appreciation was consistent, the best way to determine future appreciation was to identify past appreciation. You would ask a real estate agent how much properties in the area have appreciated in the past several years; then use the average and be conservative. Now, it's difficult. Project low.

Q: The Equity Share Calculator™ asks for Investor Return per year. What is this and how should I fill this in without an Investor partner yet?

A: Before the recession, most Investors were projecting a 10-12% annual return. Family member Investors and friends usually project a lower return. But there are no guarantees and it all depends on your individual situation. Now, everyone's projected return is much lower.

Q: What is in the Shared Ownership Equity Sharing Agreement?

A: The Shared Ownership Equity Sharing Agreement contains the basic details of the agreement between the partners regarding the property including the length of agreement, the payments to be made by the Occupier, the procedure for making improvements to the property, how the proceeds will be shared, what happens if there is a default and more. It is available at our Product page.

Q: Why do my co-owner and I need an Equity Sharing Agreement?

A: In a standard purchase, all ownership rights and obligations are transferred to one person or married couple. With co-ownership, an agreement must be created to allocate these rights and duties between more than one owner and set up procedures for circumstances that may arise. The model Equity Sharing Agreement unifies your goals and gives you and your partner the confidence and security you need to own an expensive asset like real estate together. Furthermore, the IRS tax code which authorizes shared ownership, requires to a Shared Equity Financing Agreement between the parties.

Q: Is the model Equity Sharing Agreement thorough?

A: Yes, the model agreement has been used for thousands of transactions. It is highly detailed and attempts to address the most common situations that occur in co-ownership transactions. This is the agreement used by Marilyn Sullivan when she prepares documents for her clients.

Q: Can the Occupier make improvements to the property?

A: Yes, the Occupier can make improvements to the property with the written consent of the Investor.

Q: Will the Occupier get the cost of improvements back?

A: Yes, before the property's appreciation is split, capital contributions such as improvements in the house are returned.

Q: Does the Occupier pay all the expenses of the property?

A: Yes, the Occupier gets exclusive occupancy of the property and pays all its expenses.

Q: What is rental reimbursement?

A: It is a shifting of some expenses from the Occupier to the Investor. Since the Occupier lives in the entire property but only owns part, the IRS requires the Occupier to rent back the Investor's interest in the property. This has no material impact on your transaction. You still pay the property's expenses and no more. But, a small portion of the expenses are paid into an Investor Account then paid out of the Investor Account to property expenses. We call this rental reimbursement. All of this is provided for in the model agreement.

Q: Does the Occupier receive all the tax deductions?

A: Yes, except for the small amount called rental reimbursement described above. The Equity Share Calculator™ approximates each partner's tax deductions.

Q: How is ownership of the property split between the co-owners?

A: The Shared Ownership Equity Share Calculator™ is a one-of-a-kind tool which helps to calculate the ownership split based upon the term on the partnership, the estimated yearly appreciation and the projected return the Investor wants to see on his investment. You input these numbers and the ownership split is calculated for you.

Q: How long can our equity sharing agreement last?

A: The equity sharing partnership should last at least three years and not much longer than seven. It can go on longer than this, but 3 to 7 years is the typical timeframe. At the end, you and your partner can extend the agreement if you like, or upgrade and co-own the next property together too.

Q: How does co-ownership end?

A: The co-ownership ends at the end of the term agreed to in the Shared Ownership Equity Share Agreement. The Occupier can buy out the Investor, the Investor can buy out the Occupier, or the property can be sold.

Q: Are my co-owner and I committed to co-own the property for the entire term?

A: Yes, all co-owners are in the investment for the term of the agreement. But, if something unexpected happens and either party needs out, they should discuss the best solution which sometimes is early buy out described in the agreement.

Q: Can the Occupier continue to live in the home after the shared ownership period is over?

A: Yes, the Occupier has the first option to buy out the Investor. This can be done by refinancing the property.

Q: How is the property valued at the end of the transaction?

A: By a formal appraisal on buy out, or by the market in the case of a sale.

Q: How are the proceeds split?

A: Before splitting the property's appreciation, each partner gets back the capital contributions they have made (down payment, and cost of improvements). After the loan is paid off, the remaining equity is split according to the terms of the Equity Sharing Agreement.

Q: Once the term of the partnership is reached does the Occupier get credit for the amount of money initially put into the down payment before the appreciation is split?

A: Yes, the Occupier gets full credit for the amount put into the down payment. After theOccupier and Investor get their down payments and improvement costs back, they split the appreciation in the property according to the ownership percentages.

Q: Why are two legal agreements: the Preliminary Commitment and the Equity Sharing Agreement?

A: The Preliminary Commitment allows the partners to have the confidence in one another to move forward and make an offer on a property. The Shared Ownership Equity Sharing Agreement is signed once the property is found and the details about the property and the type of loanare known. Both are available at our Products page.

Q: What about tax benefits?

A: The Occupier gets the same benefits he or she would get from a solely owned principal residence. You claim the deductible payments you make (except for a small portion the Investor claims) and you receive the exemption you would at sale as it applies to your ownership portion of the sale price.

Investor FAQs

Q: How is the down payment split by the parties?

A: In the traditional Investor-Occupier transaction, the typical split is Investor pays 17% of the purchase price while the Occupier pays 3%. The loan is 80%. In the other transaction types, the parties usually evenly split down payments and expenses.

Q: What are the Investor's greatest benefits in this type of transaction?

A: The Investors greatest benefit is owning a property with a co-owner who cares for and often improves the property and pays its expenses. No more tenant hassles, maintenance concerns or paying holding expenses.

Q: I belong to a real estate investment club that buys property as its own stand-alone legal entity. Can our club be the Investor partner?

A: Yes. In fact, our system is especially well suited to Investor groups who seek a mid-risk potentially high return investment strategy.

Q: Should I set up my own LLC to co-own this property?

A . Many Investors decide to own their investment properties in an LLC to shield their personal assets from liability.

Q: I hear that I can use my retirement account funds to purchase real estate, including co-owned real estate. Is this true?

A: Yes, as long as you do it through a self-directed retirement account custodian. It costs about the same as your stock broker.

Q: I am a seller who can't sell my property. Should I offer equity sharing?

A: Yes. You can cash out for the amount of the loan (about 80% of value) and convert the interest you retain to your investment property. This way you get out from under the payments and are able to move on. But still you will have an investment in your property. Seller Investors think of this as the best of both worlds. In a buyer's market, the seller who equity shares gains a market of his own. In this new market where loans are more difficult to qualify for, the seller's best way to get out from under is to refinance or just keep the existing loan and offer the Occupier an All-Inclusive Note and Mortgage/Deed of Trust.

Q: If I want to sell my home but I have excess gain, can equity sharing solve my problem?

A: Yes. A home seller confronted with capital gains exceeding the principal residence exclusion can solve his tax problem by an equity share sale. He reduces his sale price and his tax basis so it conforms to a tax-free sale. He converts the rest of the property to his investment property and becomes the Investor in the equity share. This format of equity sharing can be the ideal way to shelter excess gain.

Q: I'd like to invest with other Investors? How does that work?

A: We call this a joint venture where all owners are Investors. When you come together with more than one, you can buy more and have help with management. It makes it all much easier.

Q: How is ownership of the property split between the co-owners?

A: The Equity Share Calculator™, available on our Products page, does this for you. One of the variables important to the Investor is how much return on investment the Investor wants to project. This factor is considered when setting the co-owners' ownership interests.

Q: Can the Occupier make improvements to the property?

A: If a capital improvement is required (i.e., new roof), the Occupier must make it and pay for it. The written consent of the Investor is required for other improvements.

Q: Will the Occupier get the cost of improvements back at the end?

A: Yes, before the property's appreciation is split, capital contributions such as down payment and improvement contributions are returned. You will have agreed to any improvement and its cost in advance.

Q: What if I want to make improvements to the property to increase its value? Can I do this and will I get the money back?

A: Yes, you can make improvements with the consent of your co-owner. You too will receive credit for the amount you pay as a capital contribution before the property's appreciation is split between you and your co-owner.

Q: Can I see what my transaction will look like?

A: Yes, the Equity Share Calculator™, available at our Products Page, lets you project all financial details so you can see what your transaction will look like from beginning to end. Run calculations until you find the best fit for you and your partner.

Q: The Equity Share Calculator™ asks for the property appreciation rate. How do I know this?

A: A: When appreciation was consistent, the best way to determine future appreciation was to identify past appreciation. You would ask a real estate agent how much properties in the area have appreciated in the past several years; then use the average and be conservative. Now, it's difficult. Project low.

Q: The Equity Share Calculator™ asks for Investor return per year. What is this?

A: This is a bargaining point for the Investor and Occupier. The Investor projects the return he or she would like to see on investment. This projected return is used by the calculator in assigning ownership percentages. Before the recession, most equity share Investors joining with a Occupier projected a 10 to 12% annual return. Now, this projection is much less. Use the Equity Share Calculator and see what works for you. Remember, this is not guaranteed; it is projected. If the property appreciates more than is projected, returns will be higher and vice versa.

Q: What about tax benefits?

A: Investors get the same tax benefits as a solely owned rental property, including depreciation on ownership interest and tax free gain by exchanging out at the end of the term.

Q: Does the IRS allow mixed tax treatment for one property?

A: Yes, the mixed tax treatment in the traditional equity share format is permitted by the IRS. Internal Revenue Code §280A allows the Occupier to claim his interest in the property as his principal residence while the Investor claims his as his investment property.

Q: What will my tax return look like?

A: Since the Occupier lives in the entire property but only owns part, the IRS requires the Occupier to rent the Investor's interest in the property. What happens is the Occupier pays a small portion of the expenses earmarked as rent into an Investor Account. Then he pays an equal amount of property expenses out of this Investor Account. The net result is you have some rental income offset by deductible property expenses. This enables you to claim the property as your investment property and receive investment property tax treatment.

Q: Your site uses the term 'partner' repeatedly. I thought these Investor-Occupier transactions can't be seen as partnership by the IRS?

A: This is true. We speak of partners in a general sense whereas the IRS speaks of the term in a legal sense. You and your Occupier partner are not partners as legally defined by the IRS.

Q: How long can our shared ownership equity sharing agreement last?

A: It should be at least three years and not much longer than seven. It can go on longer than this, but these are typical timeframes. At the end, you and your partner can extend the agreement if you like, or upgrade and co-own the next property together too.

Q: Are my co-owner and I committed to co-own the property for the entire term?

A: Yes, all co-owners are in the investment for the term of the agreement. But, if something unexpected happens and either party needs out, they should discuss the best solution which sometimes is early 'default' buy out described in the agreement.

Q: Can we refinance at any time?

A: Yes, with the consent of all parties.

Q: Does the Occupier have to live in the home during the equity share?

A: Yes, but if a situation arises where the Occupier cannot, the model Equity Sharing Agreement allows it to be rented with the Investor's consent.

Q: Who pays the closing costs?

A: Since the Occupier receives full occupancy of the home, the Occupier pays them at purchase and is not reimbursed. The Occupier also pays them at sale if he makes the decision to move instead of buying out the Investor.

Q: Does the Occupier pay all the expenses of the property?

A: Yes, the Occupier receives exclusive occupancy of the property and pays all its expenses.

Q: What about the loan? What is the qualification process?

A: While the down payment is shared by the co-owners, the Occupier qualifies for the entire loan. If it important to you not to be liable on the loan, it may be best for the Occupier to acquire the property in Occupier's sole name, transferring the Investor's interest after closing.

Q: How can I be sure that my Occupier partner is making the payments on time?

A: The model Equity Sharing Agreement specifies that you will receive a copy of each payment made by your Occupier partner. This will help you identify any payment default and take corrective action immediately.

Q: What if my Occupier partner fails to make payments?

A: The Investor gets to buy out the Defaulting Occupier at 70% of value and pays this amount over time. The model Equity Sharing Agreement makes Occupier default into a win for the Investor.

Q: What if my Occupier partner is not taking good care of the property?

A: Our unique system creates a powerful financial incentive for your partner to take good care of the property. This person has a significant financial stake when the property sells, and therefore is motivated to take care of the property and to improve it. Just to be safe, the model Equity Sharing Agreement assigns maintenance obligations and necessary capital improvements to the Occupier. If, for some unusual reason, your partner does not take good care of the property, the model Equity Sharing Agreement considers this a default.

Q: What about other Occupier defaults?

A: The model Equity Sharing Agreement gives a significant financial benefit to the Investor in the event of Occupier default. A performance deed of trust/mortgage or quitclaim deed signed by the Occupier in advance can and should be prepared (consult your attorney, or let us prepare these documents for you at low, fixed rates described on our fees page) for better security.

Q: Why do my co-owner and I need an equity sharing agreement?

A: In a standard purchase, all ownership rights and obligations are transferred to one person or married couple. In the co-ownership, an agreement must be created to allocate these rights and duties between more than one owner and to set up procedures for circumstances that may arise. The model Equity Sharing Agreement unifies your goals and gives you and your partner the confidence and security you need to own an expensive asset like real estate together.

Q: Is the model Equity Sharing Agreement thorough?

A: Yes, the model agreement, available to you at our Products page, has been used by us and our clients for thousands of transactions. It is highly detailed and attempts to address the most common situations that occur in co-ownership transactions.

Q: Why are there two legal agreements: the Preliminary Commitment and the Equity Sharing Agreement?

A: The Preliminary Commitment, also available at our Products page, allows the partners to have the confidence in one another to move forward and make an offer on a property. The Equity Sharing Agreement is signed once the property is found and the details about the property and the type of loan are known.

Q: What are the standard provisions of the model Equity Sharing Agreement?

A: Length of agreement, occupancy requirements, payments to be made by the Occupier, the procedure for making improvements, how the proceeds are shared at the end, what is done in the event of default, and more.

Q: How do I protect against losing my investment?

A: The model Equity Sharing Agreement includes a provision requiring the property to appreciate a certain percentage designated by the Investor. If that appreciation is not reached at term, the co-ownership continues on until it does.

Q: How does the co-ownership end?

A: At the time specified in the agreement, either the Occupier buys out the Investor, the Investor buys out the Occupier, or if neither buys out the other, the property is sold.

Q: How is the property valued on buy out?

A: A formal appraisal.

Q: How are the proceeds split?

A: Before splitting the property's appreciation, each party gets back the capital contributions they have made (down payment, and cost of improvement)

Q: If we use your Do-it-Yourself tools, should we have our transaction reviewed by an attorney and a tax professional?

A: Yes. We provide you with our tools and forms with your commitment that you will have your transaction reviewed by an attorney and a tax professional. The tax laws that pertain to equity sharing apply nationwide but it is still important to review your transaction with your tax professional. Your attorney should also put their stamp of approval on your agreement because laws differ across the country, and the world. We also review the agreement if you use our form for a low flat fee. See our Fees page.

Q: What if I have more questions?

A: Marilyn Sullivan's book, The New Home Buying Strategy, is available through our Products page and will soon be available on our site as an e-book.

The above is for educational and information purposes and does not constitute tax advice.  For information about your individual situation, please consult with a licensed tax professional.