As we all know, college costs have soared over the last few decades, outpacing inflation two to one, at least. That is especially true if your student goes away to college and you have to pay thousands for housing, On- or off-campus. But here I’ll show you a great way to cut your out-of-pocket costs: Invest in near-campus housing. If you start now, you can have your plan in place by the next academic year or even the next semester.
In its simplest form, this strategy calls for you to buy a residence: a house or condo near your child's school. Your student can live there rent-free. You avoid the cost of campus housing.
After graduation, you can sell the property, perhaps to an incoming parent. Any long-term gain will be taxed at a current maximum of 20%. A loss can be used to offset capital gains realized in your investment portfolio.
Another way to avoid capital gains tax is to use a 1031 exchange. The quick take is you basically exchange the house you are selling for another house you are buying and will not be taxed on any capital gains. There are many more details to this, so please talk to your tax advisor for more details.
Parents can take buying a campus residence further for greater tax breaks. If you have the time and energy, or you can hire a realtor, scan the neighborhood near your child’s school for a house large enough for at least four tenants. Calculate the rent and expenses you can expect. Then bid for the house at a price that will cover the costs, including mortgage payments, and that will generate excess cash flow. If your property needs basic work, like landscaping, painting, and repairs, hire your child to do the work. You will get a deduction for the wages you pay while your student will likely not have to pay taxes on the income and have some pocket money to use as he wishes. In 2023 the standard deduction will be $13,850 for single filers. That means your student, presuming he or she is single, will be able to earn $13,850 without owing any tax.
Taking this strategy even further, you can rent to other students while your child occupies one of the rooms rent-free. Also, you can pay your child a modest management fee in return for collecting rents, maintaining the property, and so on. He or she may be able to receive a few hundred dollars a month. And once again you can deduct the payments and your student would likely owe no tax because of the standard deduction.
Gain On Sale
Once your child has finished school, you will probably want to sell the house. Because the demand for student housing is typically strong, you will most likely sell for a gain.
The bottom line, by saving the money you would have spent on room and board, you can come ahead by tens of thousands of dollars after four years, even if you break even on the property. Meanwhile, the monthly rental income can offset other college costs.
You may also get tax deductions that can offset the rental income. Depreciation, interest, and management fees are all deductible for owners of investment property. So are condo association charges, operating costs, taxes, and insurance. Trips to visit the college town may also be deductible if your primary purpose is to check up on your investment property.
All of these deductions may offset your rental income from tax. And if the expenses exceed the income, you may come out with a loss. Please be aware of the passive-loss rules. Consult your tax advisor.
Now, this strategy is not for everyone. You are making a real estate investment that can be substantial. Also, you are relying on a college student, your child, to manage it. While it might be beneficial for him or her to gain experience and a sense of responsibility by managing the property. He or she must be reliable.
To make this work, you must pay a fair price for a good property in the right location. You also need a dependable student to keep an eye on it. If you are willing to make the effort and your child is responsible this will be a fantastic way to offset college costs. And to boot, your child will learn more than just what’s taught in class.
If you would like to know about this strategy or others that can help you save on your college costs, please contact me at mgaer@collegefinancing.com
