Shared equity arrangements occur when two parties purchase a primary residence jointly because one party is unable to purchase the residence individually. If, for example, a parent and a young adult child purchase a home together, this type of agreement is common.

Rental of a dwelling to a person having an equity interest in the home won’t be considered personal use by the taxpayer if the rental is done under a “shared equity financing agreement” (Sec. 280A(d)(3)(B)(i)). 

As previously noted, these agreements, often entered into between parents and children, enable the latter to purchase a home. A “shared equity financing agreement” is one where two or more people acquire qualified ownership interests in a home and one (or more) of the owners is entitled to occupy the home as a principal residence. That person pays rent to the non-occupant owner(s) at fair rental value (FRV) (Sec. 280(d)(3)(C)).

Proposed Reg 1.280A-1(e)(3)(v) provides that a shared equity financing arrangement may exist, even if one or more of the owners doesn’t charge the occupant fair rent for use of the home. However, the exception to the personal use rules for fair rental to other persons for use as a principal residence, applies only to those owners who do charge FRV.

Fair rental is determined at the time the shared equity financing agreement is entered into and must take into account the occupant’s qualified ownership interest. “Qualified ownership interest” is an undivided interest for more than 50 years in the entire dwelling and any appurtenant land acquired in the transaction to which the shared equity financing agreement relates.