Q My wife and I want to help our married son and his family buy a house. I make three times what he does and need more deductions, and they will have trouble getting a loan for the size mortgage needed. So perhaps my wife and I should buy the house and rent it to them for what they can afford to pay, giving them an option to buy. Is there a better way to set this up, such as joint ownership? Any tax problems with this kind of an arrangement within the family?

A Several months ago, I wrote a column on shared equity. Since then, I have received many letters from readers, indicating that they either did not see that column, or asking me to reprint that article.

Accordingly, I am taking the liberty of reprinting the article, with some modifications.

Shared equity is the definition of what you are describing, and in my opinion it is a concept worth considering by every real estate investor and buyer.

In 1981, Congress amended a section of the Internal Revenue Code and authorized investors to take their share of deductions for depreciation, interest, taxes, insurance, condominium fees and other similar expenses for property rented by a relative or an owner-occupant.

Before 1981, if, for example, a father owned property with his son who was living on the property, the father was prohibited from taking the depreciation deduction.

In 1981, Congress recognized the inequity of this situation, and by amendment permitted what is now known as "shared equity." Unfortunately, as of today the Internal Revenue Service has not yet issued final regulations on the concept. (Incidentally, months later, the IRS still has not issued final regulations.)

However, because the IRS has issued draft regulations, and because the law is on the books, shared equity can and should be considered a very valuable real estate investment tool.

Here is a general outline of how shared equity works. We have two parties. One is known as the owner-occupant and the other is known as the owner-investor. Let us assume a 50-50 split, although the property does not have to be divided equally.

The owner-occupant and the owner-investor each pay 50 percent of the monthly mortgage costs and taxes. Both parties are entitled to deduct from their income taxes their share of the mortgage interest and the real estate taxes.

The owner-occupant pays rent to the owner-investor. In our example, because the owner-occupant owns only half of the house, he or she pays 50 percent of the fair market rental to the owner-investor.

This rental is considered rental income to the owner-investor. However, the main advantage for the owner-investor is that he or she is entitled to depreciate 50 percent of the property.

First, the owner-occupant must pay a fair market rental for the portion that he or she does not own. Perhaps the best way to determine this fair market value is to have an appraiser (or real estate agent) give you a statement in writing as to what he believes that fair market rental of the property is.

With such a document in your files, you should be able to justify the rental if and when the IRS comes knocking at your door.

There are those who believe that owner-occupants could pay somewhat less than fair market rental because they are going to be managing the property themselves, thereby saving the owner-investor the additional costs of hiring a property manager.

This argument has merit, but unfortunately IRS regulations have not yet been finalized. (A recent tax court case authorized the owner-occupant to pay fair market value less what would have been the cost to the investor for a property manager.)

A second requirement is that there be an equity-sharing agreement. This document -- which must be in writing and signed prior to the purchase of the property -- should spell out the terms and conditions between the owner-occupant and the owner-investor.

For example, when will this agreement terminate? Who has the right to buy out the other and under what arrangements?

These very serious questions must be resolved, and I strongly recommend that you do so now while the two parties still are talking to each other. You do not want to wait until they are at odds with each other to try to resolve these questions.

A third requirement of shared equity is that one of the owners actually occupies the property as his own personal residence.

It is not possible in the space of this column to analyze fully the shared-equity arrangement.

However, it does have tremendous possibilities for people such as:

Parents in a high tax bracket who want to help their children with down payments and closing costs.

Children in a high tax bracket who want to help retired parents purchase a retirement home.

A friend who wants to lend money to a purchaser to assist in a home purchase.

An investor interested in a residential real estate investment who is looking for a solid, limited-risk shelter.

Potential buyers with limited savings but good income who need a bigger house than they can afford.

The possibilities of shared equity are unlimited.

But it does require careful planning, a well-drafted written agreement and a full understanding of the tax and financial considerations involved.