Q: We are considering purchasing a town house as a joint venture with a young couple who would have difficulty qualifying for a mortgage on their own. We propose that the couple own one-half interest in the property and occupy it as their residence.

They would pay half of the monthly principal, interest, taxes and insurance plus half of the estimated fair market rental of the property. We would pay the other half of the monthly costs and receive the rental income. Is there a way that we can depreciate our interest in the property?

A: Much has been written about shared equity, which is the definition of what you are describing. In my opinion, this 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, for example, if a father owned property with his son, who resided at the property, the father was prohibited from taking depreciation deductions. 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.

But because the IRS issued draft regulations several years ago and because the law is on the books, shared equity 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. This is, however, subject to the passive loss tax rules enacted by Congress in 1986.

There are a number of legal requirements for qualifying for the shared-equity program.

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 a real estate agent give you a statement in writing as to what he believes is the fair market rental of the property.

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. A tax court opinion has ruled that owner-occupants could pay somewhat less than fair market rental because the investor will not have any vacancy losses, and because the owner-investor will save the additional costs of hiring a property manager.

A safe deduction from fair market rental would be to take 15 percent from the fair market rental value, and then the owner-occupant would pay half of that amount to the owner-investor.

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 are talking to each other. You do not want to wait until the parties are at odds with each other to try to resolve these important questions.

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

A fourth requirement, and one that is often misunderstood, is that the ownership interest in the property is for more than 50 years. This does not mean that the shared-equity contract has to run for more than 50 years.

As long as you rent the property for more than 50 years, or own the property outright (in "fee simple"), this satisfies the legal requirement.

It is not possible in the space of this column to analyze fully all of the shared-equity arrangements. However, it does have tremendous possibilities for such people as:

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

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

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

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

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

The possibilities of shared equity are unlimited. But, as in every real estate transaction, it requires careful planning, a well-drafted written agreement, and a full understanding of the tax and financial considerations involved.

Anyone considering a shared-equity agreement should evaluate the numbers carefully, based on the current tax laws in effect relating to real estate. Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers also may send questions to him at that address.