financing secrets of a millionaire real estate investor.pdf

92 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR
Tax Code Compliance
Equity sharing arrangements are governed by Section 280A of
the Internal Revenue Code (IRC). Labeled a Shared Equity Financing
Agreement (SEFA), IRC Section 280A permits the nonresident partner
investment property tax benefits (namely depreciation). In addition,
the resident partner can take advantage of the benefits of owning a
principal residence (namely, the mortgage interest deduction).
The nonresident partner is essentially treated for tax purposes as
a landlord, taking depreciation for his or her ownership interest to the
extent he or she receives rent. So, for example, if fair market rent for
the property is $1,000 per month and the resident/nonresident equity
split is 60/40, then the resident must pay $400 in rent to the nonresident
partner if the nonresident wants to take the depreciation deduction.
In turn, the nonresident partner returns the rent to property
expenses for which the resident partner is responsible (in this way,
the cash contribution by the resident partner is not increased—it is just
shifted to conform with the tax code). If the resident does not pay
rent, but rather makes all of the mortgage interest payments directly
to the lender, then the investor receives no tax benefits, leaving them
all to the resident. The agreement can be made in a number of ways,
depending on the needs of the parties and their needs for the tax deductions.
The parties must have a co-ownership agreement that complies
with IRC Section 280A in order to reap the benefits of this mixed use
tax plan. If the relationship is deemed a “partnership” by the IRS, then
the rules of IRC Section 280A are not applicable. A highly recommended
book that covers the tax implication in detail is The New
Home Buying Strategy by Marilyn Sullivan, Esq., .