Historically, parents of college students have looked at real estate ownership as a method of reducing or eliminating the cost of sending their child to college for five (or so) years. As investment properties skyrocketed during the boom of the housing market though, we saw less and less investment as the opportunity for safety was diminished.
Now that the boom of the housing market is five years behind us, I am starting to see more and more parents want to talk about how buying a home for their incoming college student to see if it actually helps them defer the cost of sending their child to school. While I am not a qualified tax adviser (read this as saying double check everything written here with your tax adviser), I have worked with many parents who chose this solution as a way of paying for college for their children.
Sending A Child To College
It is estimated that the average parent spends about $20K each year towards the cost of their child attending a State University here in Florida. Obviously, with room, entertainment, board, entertainment, tuition, entertainment, books, entertainment and the other costs of being a young college student going up, parents are looking for a way to help pay for it all.
Real Estate Investments Versus Cost Of College
Ever since I started in real estate in the early 1990s, I have worked with parents who learned how to offset the non-tax-benefit costs of education with the tax-benefit costs of real estate ownership. So, how does this work?
In a nutshell, the parents of college students will buy a larger rental home for their child. The child will arrange for several friends to move in to offset the rental costs. The parents will pay the child a management fee (deductible) for the help keeping the home rented. The parents and child will enter into an arrangement for the child to take care of management and maintenance, in return for the management fee and sub-market rent.
The value of the management fee and rent offset for most people doing this is about $500 per month. The simplicity of the program is this. Rather than send $500 to your kid in college, you can instead “lose” $500 per month on your real estate investment. If your child manages the property well, your out-of-pocket could even “zero out,” thus you would be giving your child $500 per month with no cost to you.
The key to understanding why this simple strategy saves money is understanding how our tax laws work. Since sending money to your child is not tax deductible for schooling, it is better to own a property and “pay” money to your child then to just send it to them tax free. If you are a parent of a college student, you really should explore this in greater detail.
Take everything written here with a grain of salt, and then contact your tax expert to see if a plan like this is right for you.
Photo: Phil Roeder