is "Investment" money taxable in a shared equity agreement

[Otterman]

Hello, and thanks in advance!

Regarding a Shared Equity Agreement:

Could we (homeowner/occupiers) owe a lot of taxes on the “Investment” money we are handed, up front, by the company (Investor) for 2023 like taxable income, or like capital gains tax triggered as if I just sold part of my home? Seems like a terrible thing to be taxed. Desperation... already owning and paying taxes on the property... having to essentially pay it back....?

Details:
We work hard but are very low income in 2023, truly growing a great, little business.

To finance the business and get us through a while we are closing on a Shared Equity Agreement. We thought to look at all sorts of hypothetical scenarios and fully understand the deal, including tax details to do with when we settle or sell, concerning appreciation, and deductions on that whole end of things.

Suddenly someone mentioned, “What about the money you get now (the Investment money I, the owner and occupier receive from the firm, the Investor) – won't that be taxable income or something for 2023?”

Oh for Pete's sake I certainly hope not.

If I got $90K as payment for something, I'd owe like $20K under normal income circumstances O.O

But no one would tax you on a loan you have to pay back. While this is not technically nor legally a “loan”, I am certainly, in effect (for all intents and purposes) going to have to “pay it back” (and then some).

I was able to find someone saying that the particular company I'm using is known for “deferring any taxes” on this amount, but it was rather anecdotal and I can't find a definite answer.
Here's what I saw:

Does the “sale” of equity in your home trigger capital gains tax?

(Redacted Company Name)'s investments are designed to be tax-deferred, so pending an unusual circumstance, you won’t owe taxes as a result of receiving an investment.
(end paste)

I own the home, no liens or mortgage left, prior to closing on this soon, and I do not rent it out. We are also very low income for 2023.

Thank you for your help.

Jeff in Florida

 

[adjusterjack]

What you've written so far is vague and tells us nothing.

Nobody is going to give you a big chunk of dollars without getting something in return, either now or later.

What are you going to sign in return for the money?

Do you even know?

There will be a contract, you can be sure of that.

If you can't explain to us what your future obligation will be, you need to consult an attorney and a tax pro.

 

[LdiJ]

I agree with AJ. Your explanation was very vague and short on the details needed to understand exactly what it is that you are doing.

Instead of assuming that somehow saying "Shared Equity Agreement" makes it clear, just explain what it is you are actually doing.

 

[Otterman]

Sorry, I thought this was a more common, standard thing. I describe it below.
I was only wondering if I would have to pay income tax on the money they give me up front, nothing about the future obligation which I understand much more clearly..

This is like a loan but not technically a loan,

They give you, say, 25% of what your home is worth, for equity in your home. They call that the "investment" (the money you get).
They are the Investor and I am the Occupier.
If you wait 10 years to settle, you then owe 50% of the home value back to them.
We happen to plan to settle in 2 years where there's a much more comfortable cap of a maximum dollar amount based on the investment money, plus some, in lieu of a % of the new appraisal, unless that number is lower.

I'm only wanting to know how that money given to me, now, would be taxed by the IRS.
Would it trigger capital gains tax like I sold a home, because they are "buying equity in my home"?

I guess it's up to the 50 pages of legalese where Hometap supposedly "defers" this, which you would need to see.
Sorry if you felt I wasted your time.

What you've written so far is vague and tells us nothing.

Nobody is going to give you a big chunk of dollars without getting something in return, either now or later.

What are you going to sign in return for the includemoney?

Do you even know?

There will be a contract, you can be sure of that.

If you can't explain to us what your future obligation will be, you need to consult an attorney and a tax pro.

 

[adjusterjack]

They give you, say, 25% of what your home is worth, for equity in your home. They call that the "investment" (the money you get).
They are the Investor and I am the Occupier.
If you wait 10 years to settle, you then owe 50% of the home value back to them.
We happen to plan to settle in 2 years where there's a much more comfortable cap of a maximum dollar amount based on the investment money, plus some, in lieu of a % of the new appraisal, unless that number is lower.

This is not LIKE a loan. It IS a loan. You get the money now, you have to give it back later, with interest.

Let's do some math. You own the home free and clear, no mortgage, and you occupy it as your main (primary) residence.

For illustrative purposes let's put a value on your home of $500,000 today and in ten years, let's say the value of your home has appreciated to $750,000 and you would owe half of that, $375,000 if you paid off the loan at the end of ten years.

To borrow $100,000 today and owe $375,000 in ten years making no payment, the debt grows at an interest rate of 14.15%.

If you pay if off in 2 years, the debt would only have grown to $130,000.

The loan has nothing to do with capital gains tax. Capital gains tax requires the sale of your home which will likely be necessary to pay off the loan. You don't pay capital gains tax until you sell the home. Then it's the sale price less what you paid for it when you bought it, with some adjustments. The first $250,000 of gain ($500,000 if married) would be exempt.

So, of course the taxes are "deferred." That would happen with any loan. The "investor" isn't doing you any favors.

I'm guessing that there is something in the contract that says if you can't come up with the money or you can't sell the house for enough to cover the debt, you sign over the house to the "investor."

This deal is often described as a reverse mortgage.

The euphemisms this "investor" is using is BULLCRAP.

It's a loan. A very bad loan, designed for desperate, naive people.

 

[LdiJ]

Sorry, I thought this was a more common, standard thing. I describe it below.
I was only wondering if I would have to pay income tax on the money they give me up front, nothing about the future obligation which I understand much more clearly..

This is like a loan but not technically a loan,

They give you, say, 25% of what your home is worth, for equity in your home. They call that the "investment" (the money you get).
They are the Investor and I am the Occupier.
If you wait 10 years to settle, you then owe 50% of the home value back to them.
We happen to plan to settle in 2 years where there's a much more comfortable cap of a maximum dollar amount based on the investment money, plus some, in lieu of a % of the new appraisal, unless that number is lower.

I'm only wanting to know how that money given to me, now, would be taxed by the IRS.
Would it trigger capital gains tax like I sold a home, because they are "buying equity in my home"?

I guess it's up to the 50 pages of legalese where Hometap supposedly "defers" this, which you would need to see.
Sorry if you felt I wasted your time.

You are not selling a percentage of your home. While it is called an investment it is still a type of loan (with collateral) because it has to be paid back. You would then be loaning the money to your business (and you should draw that up officially, with interest that is sufficient to cover the extra you will have to pay back) and your business will use the money to try to make a profit. It will not be taxable to the business either because again, it is a loan. Only the profits made by the business will be taxable.

It is important that you understand exactly what you are doing, and I am not entirely sure that you understand the flow of the money. If you don't then you could inadvertently make mistakes in paperwork which could cause issues down the road. It would be best if you got an attorney involved and consulted with a tax professional.

Even if you are a sole proprietor you really need to be looking at things as though you and the business are separate entities. I also agree with AJ that this is not a good deal. Have you explored getting an equity line of credit via a bank? Or an SBA (Small Business Administration) loan from the government? At least with those you would have a shot at keeping your home if the business fails.