Partnership structure where one party lives in the property?

Question

My partner and I are looking into a 4-unit property where one party would actually live in one of the units in order to get better financing and a lower down payment. Has anyone seen or done this type of deal before? I'm not sure what makes the most sense in terms of how this type of partnership would be structured, or if this is not really an arrangement that lends itself well to a joint deal. Would appreciate any thoughts and perspectives, and especially an example if someone has done this successfully before (or can point to an example of someone who has).

Thanks, DA

Thanks, DA

Frank Hinck · Answer

@Kevin Romines

Just the piece of info I was looking for, in a year I’ll be trying to help some younger friends house-hack a 4plex and was starting to think on these kinds of questions.

Dave Spooner · Answer

@Dan A. You're main concern would be the amount of money you each have "at-risk." This is a bit of an oversimplification, but in essence, the At-Risk rules state that you can only shelter from taxes an amount equal or less than the amount that you have at risk in the venture. For example, if you put $10,000 into the purchase and you had total deductions on the year of $20,000, you could only limit your tax liability by $10k, not the full 20. Here's a more substantive article on it: https://www.investopedia.com/t...

If each of you is financing the property equally, that shouldn't be a concern whatsoever. Even if at risk limitations reduce the amount you can claim in a given year, unused tax deductions will carry forward to the next, so it's a "use it, or lose it" situation. But there shouldn't be a great concern over you living there vs. him living there beyond what I mentioned above.

Kevin Romines · Answer

Both of you can be on the loan and title. One as an owner occupant and the other as a non-owner occupant co-borrower. Then just have the owner occupant pay rent based on the market rents that will show on the appraisal. Once all rents are collected and the mortgage and any other expenses are paid, then the rest is cash-flow that can be split after a sufficient amount of reserves is built up.

Dan A. · Answer

Thanks again @Kevin Romines and @Dave Spooner for the thoughts.

Any tax experts reading this? Let's say both partners own a 50% interest, would everything get split down the middle? What about mortgage interest / depreciation? Does it matter that I would be living in the home? Would we still be able to take the depreciation tax deduction?

Appreciate all thoughts.

DA

Dave Spooner · Answer

This is similar to the way in which I purchased my first property. We transferred the property into an LLC within a few months of closing. I'd also strongly agree with Kevin that you should collect rent on the unit and split the profit after. Otherwise, you can wind up in some tricky tax situations in which you may not be permitted to take the full depreciation of the property. Treat all space as rental space.

Kevin Romines · Answer

You cant do the loan in an LLC or any other entity. You can only do the loan in your personal name. Although, Fannie Mae allows the title to be transferred after closing to an LLC that the borrowers on the loan are the majority members of? As far as the operating agreement on the LLC, I would consult an attorney and have them write that for you.

Dan A. · Answer

Thanks Kevin, that makes a lot of sense. Do you know how we should structure this? LLC / partnership or something else? And how would each party get taxed on the annual income?

Partnership structure where one party lives in the property?

Most Popular Reply