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Equity Sharing Mortgage Benefit Calculation
Original message from: Joe@fundingpartners.org
We are seeking evidence of precedence or formal opinion of treatment
under IRS guidelines as to calculating and reporting an employee
Our CDFI provides third party loan services to employers that offer
purchase assistance mortgages to their workforce. The programs offered
through our organization are fully funded by the employer in the form of
a subordinated mortgage. Because many participating employers are
located in high cost resort areas of Colorado, most programs are devised
as equity sharing arrangements whereunder no interim payments are
required. The loan is repayable in lump sum upon maturity (typically 15
years or longer), sale or refinance of the property, or no longer
occupied as a primary residence. The loan is repayable according to a
fully amortizing schedule at a stated rate of interest in the event of
When devising the program in 2004, key factors were considered,
* A traditional amortizing loan product was unattractive to the
market as most purchasers were already testing appropriate debt ratios
to qualify for the primary fixed-rate fully amortizing mortgage product
permitted for use by our CDFI.
* An equity sharing mortgage product utilized by our CDFI
enjoyed great success and easily replicated for the proposed program.
* Secondary mortgage market participants disallowed the use of
an implied rate of interest unless periodic payments of interest were
required to fully amortize the loan within a specified term.
For definitional purposes, the equity sharing model employed is
evidenced by a promissory note and subordinated deed recorded against
the subject property. Repayment is triggered by any one of several
factors and occurs as a lump sum repayment of principal and a pro rata
share of equity improvement during the holding period. i.e. if the loan
amount constitutes 10% of the original purchase price, the borrower
repays principal plus 10% of appreciation (further calculated as current
value minus original value).
Resulting from a recent audit by the IRS, one client of our clients has
been instructed to impute an interest rate equal to or better than the
prevailing Applicable Federal Rate for purposes of calculating the
annual taxable employee benefit. To this point, most employers have
reported the taxable benefit upon event of repayment, at which time it
is most practical to calculate the actual benefit, if any, derived from
the financing terms. An interim implied rate is considered highly
detrimental as it would rely most heavily upon speculative conjecture
and subject to methodology criticisms.
At least according to one IRS agent, this type of financing arrangement
is not permitted. Is anyone aware of precedence for the tax benefit
treatment where the actual benefit is recognized in future periods?
Thanks for any guidance!
214 S. College Avenue, 2nd Floor
Fort Collins, CO 80524