Here’s a very unique yet overlooked government college funding solution that goes beyond college tuition tax credits. Actually, it’s better than that. This is a super practical financial tax planning idea to save you a ton on tuition and fund your retirement at the same time.
I learned about this from a client, Rochelle. When her daughter went to college, she bought a small three-unit building near campus. Her daughter moved into one unit and rented out the other two.
The daughter became the property manager. The money Rochelle paid her daughter was tax deductible. While her daughter had to declare the income, her tax bracket was lower, so net-net, the family saved tax money. This is a great example of income shifting. (Another way to accomplish this is to think outside the box and make your 529 contributions tax deductible.) Added bonus – no dormitory bills. Sweet.
When her daughter graduated college, Rochelle sold the property at a nice gain and that helped build her (post-tax) savings. Anyone can use these strategies. Do you think it makes sense to take a close look at these ideas with real estate prices as low as they are? You better believe it.
I’m not a tax expert (thank G-d) so I strongly recommend that you speak with a tax professional before you execute this kind of strategy. And if you don’t have the down payment, I can’t recommend that you start borrowing money. But it really makes sense right now to consider this kind of approach if you have the cash.
I can see a number of other potential benefits. Chief among them is the experience that Junior gets. He learns the meaning of taking care of something. This will help him develop authority and management skills – without you having to pay the price.
I’m seriously thinking about trying this out after my daughter finishes her freshman year at college. I don’t think it would be fair to burden her with that much responsibility during her first year in college, but it looks pretty darn attractive for her second year if everything goes well.
Have you done this? If so, how did it work out? What other tips can you share that can help us reduce the cost of higher education?
Josh says
June 2, 2009 at 10:37 AMMy Dad and I seriously considered doing this when I was in college, but we never found the right opportunity.
One thing I would say about it is that if it were me, I would look more towards a large single family home instead of a multi-unit building.
A few reasons I say that are…
1. It allows you more control over what happens in your property. I’m sure we all remember what the “party houses” in college were like. All it takes is one rentor who parties a little to hard to destroy your property. By having one unit with multiple rooms, you can easier control both who lives with you and what goes on in the home.
2. It is easier to take care of after you move out. If you are going to keep the property after you graduate college, it is a lot easier to rent out and take care of one single family home than it is to do the same with a multi-unit home. My dad and I own several of both, and the single family ones are much smaller headaches, generally.
3. It seems like it would be easier to get around claiming the rent in a single family home. Since you are the principle resident of the home, you technically could be living there alone and not collecting any rent. Not that I’m advocating being dis-honest on your taxes, just saying it is easier to get “creative” when only one unit is involved.
Either way I think what you listed is a great idea.