Co-ownership and Shared Equity arrangements
The Zero College Debt Program™
The Zero College Debt ProgramIn the Zero College Debt Program, we recommend
that students purchase property in their college town to reduce costs, generate an income and get tax advantages.
Many families ask about how the ownership of the property should be structured. This presentation will help you understand some of the aspects how the ownership should be set up. We always recommend that you work with a CPA to help you make the right decisions for your family to maximize your savings. Here is Kevin Ruff, CPA to talk with you about some of the decisions to be made and how they will impact you and your finances.
What is co-ownership?“When relatives purchase with other relatives, the
occupant-relative can own a % of the property and the non-occupying relative can also own a %.”
We will explore the different co-ownership possibilities and advantages for you and your child.
What % ownership is necessary to qualify as an active investor?
Why is this important?
What is co-ownership?Co-ownership arrangements allows both
parties to take advantage of tax deductions. Disclaimer: you should work with your CPA or tax advisor to get the best decisions for your situation. This is a general presentation on the concept, not individual advice on your situation.
The maximum allowable tax deduction for investment properties is $25,000/ year.
How do you participate in this?
Co-ownership RulesRules to qualify for the investor/relative to take
tax deductions associated with the rental property:
1.The dwelling must be the principal residence of the renter (relative).
2.The renters must pay a fair market rent if unrelated to the co-owner investor. (in our examples the renter is related)
3.The investor/ relative must own at least 10% of the property to qualify for tax deductions.
4.The relative investor must make material decisions related to the rental and repairs of the property.
Example 1: 50-50 ownershipPurchase home $200,000
Combined amounts
Child’s shareif 50% ownership
Parent’s shareif 50% ownership
Purchase Price $200,000.00 $100,000.00 $100,000.00
Down payment 10%
$ 20,000.00 $ 10,000.00 $ 10,000.00
Mortgage Loan 90%
$180,000.00 $ 90,000.00 $ 90,000.00
Mortgage Payment (PITI)
$ 1,373.86 $ 686.93 $ 686.93
Actual collected rent
$ 1,200.00 $ 600.00 $ 600.00
Total mo. out of pocket cost
$ 173.86 $ 86.93 $ 86.93
Note: Example used for illustration only
Home shared with renters @ $400 each *3= $1,200/moDepreciation based on $160,000 improvements/27.5 yrs=$5,842.40/yr *.75
Income shared by parents and student, reflected in Taxes.
Example 1: 50/50 ownershipPurchase home $200,000
Combined amounts
Child’s shareif 50% ownership
Parent’s shareif 50% ownership
Less Tax Deductions: YearlyInterest on mortgage $10,740.00 $5,370.00 $5,370.00Taxes on property $2,000.04 $1,000.02 $1,000.02Insurance on property $600.00 $300.00 $300.00PMI $936.00 $468.00 $468.00Repairs $1,200.00 $0.00 $1,200.00Miscellaneous $800.00 $0.00 $800.00Depreciation -student can only claim 75% depreciation of 50% $5,842.40 $2,190.90 $2,921.20Total Tax Deductions $22,118.44 $9,328.92 $12,059.22Minus rent collected -$7,200.00 -$7,200.00Estimated Annual Deductions $2,128.92 $4,859.22
Example 2: 10% Parent OwnershipPurchase home $200,000
Combined amounts
Child’s shareif 90% ownership
Parent’s shareif 10% ownership
Purchase Price $200,000.00 $180,000.00 $ 20,000.00
Down payment 10%
$ 20,000.00 $ 18,000.00 $ 2,000.00
Mortgage Loan 90%
$180,000.00 $ 162,000.00 $ 18,000.00
Mortgage Payment (PITI)
$ 1,373.86 $ 1,236.47 $ 137.39
Actual collected rent
$ 1,200.00 $ 1,080.00 $ 120.00
Total mo. out of pocket cost
$ 173.86 $ 156.47 $ 17.39
Example used for illustration only
Home shared with renters @ $400 each *3= $1,200/moDepreciation based on $160,000 improvements/27.5 yrs=$5,842.40/yr
Example 2: 10% Parent Ownership
Purchase home $200,000
Combined amounts
Student’s shareif 90% ownership
Parent’s shareif 10% ownership
Less Tax Deductions: YearlyInterest on mortgage $10,740.00 $9,666.00 $1,074.00Taxes on property $ 2,000.04 $1,800.04 $ 200.00Insurance on property $ 600.00 $ 540.00 $ 60.00PMI $ 936.00 $ 842.40 $ 93.60Repairs $ 1,200.00 $ 0.00 $1,200.00Miscellaneous $ 800.00 $ 0.00 $ 800.00Depreciation (student can only take 75% of 90%)
$5,842.40 $3,943.62 $ 584.24
Total Tax Deductions $20,657.84 $16,792.06 $4,011.84Minus rent collected -$14,400.00 -$12,960.00 -$1,440.00Estimated Annual Deductions $ 6,257.84 $3,832.06 $2,571.84
What is the impact of this change?When the parent owns only 10% of the
property, they can still claim deductions against the property up to $25,000/year.
This is all dependent on the parent’s tax bracket and total AGI.
If combined income is over $150,000, this deduction is phased out.
It is important when you set this up that you look at all your potential deductions and maximize your benefits.
Example 3: 100% student ownerPurchase home $200,000
Tax implications
Purchase Price $200,000.00
Down payment 10%
$ 20,000.00
Mortgage Loan 90%
$180,000.00
Mortgage Payment (PITI) $ 1,373.86
Actual rent $ 1,200.00 $400*3 = $1200
Income
Total mo. out of pocket cost
$ 173.86
Depreciation $5,842.40/yr est.$160,000/27.5
*.75 =$4,381.80Example used for illustration only
The parents are the co-signor on the loan and own no part of the property for tax purposes.Student takes in renters (if 4 BR, take in 3 renters and generate an income).Est. $400/renter
Example 3: 100% student ownerPurchase home $200,000
Total expenses and deductions
Allowed Deductions
Tax implications
Less Tax Deductions: Yearly Interest on mortgage $10,740.00 $10,740.00 Deductible Taxes on property $ 2,000.04 $2,000.04 Deductible Insurance on property $ 600.00
.75 * 600 = $450.00
Proportional deduction
PMI $ 936.00 $936.00 May be
deductible
Repairs $ 1,200.00 .75*1200=
$900.00 Proportional
deduction
Miscellaneous $ 800.00 .75*800= $600.00
Proportional deduction
Depreciation@ 75%-student cannot depreciate portion they use. $5,842.40 $4,381.80
Proportional deduction
Minus Rents -$14,400.00 - $14,400.00 Income Estimated Annual Deductions $ 7,718.44 $5,607.84
Putting a contract in placeWe recommend that you sit down with your child and
draw up an agreement. As part of our program, we will provide you with a sample document that you can use to craft your agreement. This is ONLY provided when you are ready to purchase a property through one of our affiliate REALTORS. As always, we recommend you confer with an attorney and your CPA to determine the best structure for your situation.
Go to: http://www.zerocollegedebt.com and sign up today!
Maximize your tax advantages and help your child learn about investing and managing money: This is Real Life Learning™ they can use for the rest of their lives to build wealth!
Key elements of contract1. Purpose of the agreement2. Ownership interest (% ownership)3. Responsibilities and restrictions4. Right to sell ownership interest/buy out price5. Division of profits from property sale6. Lease agreement7. Deposits, reserves, replacements, repairs,
maintenance8. New owners obligations under agreement9. Default terms and language10. Termination of contract11. Signatures and agreement to be bound by
contract
Contact Information:Terry J. Toomey
The Zero College Debt Program™Austin, TX
[email protected] orhttp://www.zerocollegedebt.com and go to Sign Up
Developed in cooperation with: Kevin Ruff CPA, Greenville, SC
[email protected]://www.ruffcpa.com
Thank you for your participation.
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