Reduce Taxes by Buying Your Student a House

by Dual Income No Kids on February 25, 2010 · 5 comments

Please leave us a comment for our book giveaway from The Tax Lady, Roni Deutch.

One of the best parts of The Tax Lady’s book is that it seems there is no end to the great tips she gives. The book is really easily laid out and is a wealth of information.

While not everyone can afford to do so, one of the interesting tips was the benefits to buying a house for your college student to live in while they are in school.

Instead of paying for student housing, you can reap the benefits of investing instead. Basically it goes like this:

  • You buy a house or an apartment with a couple of rooms.
  • You hire your son/daughter to manage the property (finding tenants, collecting rent, and arranging for maintenance and repairs – or learning some themselves).
  • You pay your son/daughter for their work (claiming this as legitimate management fees).
  • You charge rent from your student and their housemates.
  • You also claim deductions for mortgage interest, property taxes, and depreciation.
  • If the rental shows a loss and you qualify for the $25,000 exception to the passive loss rules, that loss can also shelter other income.
  • If you can sell the property after graduation for a profit, that is just the icing on the cake.

In addition to all of the tax benefits, you also teach your son or daughter invaluable lessons in business management and making money. It is really a win win situation.

We know someone who did this for their child who was starting Tulane in the 2005. Unfortunately, this was only weeks before Hurricane Katrina hit, so needless to say, a loss was had.

Readers: Please leave us a comment for our giveaway, and I’d love your thoughts on this idea.

Cheers,

Miel

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{ 5 comments… read them below or add one }

1 Tim February 25, 2010 at 6:01 pm

you know, there are plenty of opposing views to this, and people ought to do a real cost benefit analysis. many people overestimate the savings, appreciation, and ability of kid to manage the property. Moreover, aren't you forgetting that if you hire your kid, you are going to have to pay out social security, etc for them? i know that you can reduce your taxes by hiring your kids that are under 18, but since your college kid is above 18, there are taxes you "should" be paying as an employee.

2 Edwin February 25, 2010 at 6:10 pm

This tip sounds to me just like any "buy real estate as investment" recommendation.

Housing is likely still correcting so it's not that great of an investment. This seems to totally ignore the costs that don't actually build equity. These include the property tax, the interest you pay on your home, the homeowners insurance (I'm assuming there isn't a big enough down payment on the home) and the cost of maintaining the place (which you don't have to deal with in a rental).

Let's add in that the student will have to spend time dealing with tenants and making repairs.

And unless the student is there for their doctorate, the house won't be owned for long enough to chop down the principal.

My conclusion is that in nearly all cases the parents would be far better off just investing any money that would be spent on the house into their choice of bonds / stocks / index funds / whatever.

3 youngandthrifty February 26, 2010 at 5:59 pm

That's a wonderful idea (I personally think so), though it would be an even better idea about 5 years ago.

The housing prices have doubled over here in Canada (Vancouver) and I wish I "got in the market" earlier.

Monthly cashflow is definitely where it's at, provided that it's passive and that the tenants aren't too difficult to deal with.

4 Sustainable Family Finances February 26, 2010 at 11:53 pm

I can't definitely see the pros and cons to taking this approach, and think at the end of the day that it wouldn't likely be a good option (if even a possibility) for the majority of people.

However, I'm also considering it in a theoretical way, rather than specifically as a recommendation today. If we do have kids, I would imagine that by the time they are in college the real estate market would have changed tremendously by then.

Having worked my way through college with two jobs at a time, even if we are capable of fully providing for a college kid, I would have great reservations about doing so. Helping them to pursue entrepreneurial ventures would be a good way to do that.

Thanks for your comments!

Miel

5 Maiu June 25, 2010 at 3:35 pm

Thanks for this!
I was thinking the same way, and have looked at ” for sales” on line in the town my daughter plans to attend University in.
I am surprised to see that, as least right now, it does appear to be possible.
I decided to look this one up on google, to see if I am nuts or not, and was very happy to see what you have written here.
Also love the look of your book about : Tax tips!
Here’s hoping!

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