How Can I Expand My Purchasing Power ?

by Dian Hymer

Suppose you can't afford to buy a home in a neighborhood where you want to live. One remedy is to pool resources and buy with someone else. While this can be an excellent home buying strategy, carefully consider the ramifications before you buy.

"Equity sharing" is a fancy term for the kind of co-ownership where two or more buyers, (who are not married to one another) purchase property together. Sometimes an equity share partner is an investor who donates financially to the purchase, but who doesn't occupy the property. This is quite different from an equity sharing arrangement where both purchasers participate financially, and both occupy the property as their primary residence.

In either case, it's imperative that a knowledgeable real estate attorney draft an equity sharing or partnership agreement. This agreement should cover such details as: Who will make what financial contributions (toward the down payment, closing costs, maintenance and monthly payments)? What percentage of ownership will each co-owner have? How will decisions be made? How will the tax benefits be shared? What will be the procedure if one of the parties wants out of the partnership? How will title to the property be held? What happens if one of the co-owners dies?

First Time Tip: Buying with another owner-occupant means sharing your living space with that person. Loss of privacy can be an issue, and a friendship could be sacrificed if you aren't careful. Consider renting for awhile with your prospective co-buyer before buying to make sure you're compatible roommates.

Not all homes are conducive to co-owner occupancy. If you plan to make major renovations to a home to make it suitable to co-owner's needs, talk to an architect to make sure that what you have in mind is feasible. Also, check with a contractor to confirm that the cost isn't prohibitive.

Co-buyers usually need both incomes to qualify for the mortgage. What happens if your partner decides to get married, and the new couple wants to buy a home of their own? Or, what if your partner is transferred and wants to buy a home in the new location?

Your partnership agreement should be structured in such a way that you won't be forced out of your home. There's no question that you have more control over your domain if you are the sole owner.

Another strategy that can expand your purchasing power, which gives you more control, is to buy a property with one or more income-producing units (a duplex, triplex, four-plex). The rental income helps to offset the costs of ownership.

Multi-residential properties tend to be located in areas of high density housing rather than in more desirable single family residential neighborhoods. And, you'll still have to share physical space with someone else--much the same as living in an apartment house or condominium complex. But, you'll have exclusive use of your own unit.

Also, when you decide to sell and trade-up, the tax picture gets complicated. The IRS treats a personal residence different from an investment property. If you live in part of a property that you also rent out, you create a hybrid tax entity.

Briefly, when you sell a personal residence, you can defer paying capital gain tax if you buy another personal residence of equal or greater value within two years. But, to defer paying tax on gain on an income-producing property, you must buy another income producing property. And, you aren't allowed a two-year grace period.

The Closing: Consult a knowledgeable tax advisor before embarking on either of these home buying strategies.

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