Buying A Home For College Children
I am not sure if this is in the correct forum. If not, please move it.
I live in a college town and I'm looking to market to the parents of the college students to purchase a home for their child while at school. There is a good deal of parents that pay for living expenses so why not put that towards a home.
My plan is to encourage parents to borrow along with their son/daughter to establish credit for their child. The parents would be paying the mortgage.
I have a few questions:
1. Can the parents write off all of the mortgage interest if their child is on the deed and mortgage too? I'm assuming since the parent(s) paid the interest and not the child, they would be able to write 100% of it off.
2. Can moving expenses be deducted when the child moves out to another home? Who gets the deuction?
3. Assuming the home is sold 4 years later and not rented out or such, what are the implications of the capital gains exclusion? The parents did not live in the home the past 2 out of 5 years but the child did and the child is part owner.
Are their any other advantages I can market to parents?
THANKS
Quote:1. Can the parents write off all of the mortgage interest if their child is on the deed and mortgage too? I'm assuming since the parent(s) paid the interest and not the child, they would be able to write 100% of it off. The person(s) actually on the mortgage note have liability for the loan and are entitled to the mortgage interest deduction. Whether the parents treat this property as a second home, or as an investment rental property, they are entitled to the mortgage interest deduction. If the parents are making the full mortgage payment with no contribution from the child, then the parents should write off all the mortgage interest. I doubt the child can use the deduction.
If the child is a full time college student, how likely is it for the child to have a high enough reportable taxable income to take advantage of a mortgage interest deduction that can only be taken when the taxpayer itemizes his deductions?
Quote:2. Can moving expenses be deducted when the child moves out to another home? Who gets the deduction? A work-related moving expense deduction is taken on Form 2106. A moving expense deduction is considered work related if it is made in connection with starting work in a new location. Only the student-child will be eligible for this deduction in your scenario.
Quote:3. Assuming the home is sold 4 years later and not rented out or such, what are the implications of the capital gains exclusion? The parents did not live in the home the past 2 out of 5 years but the child did and the child is part owner.If the home is treated as a second home for the parents and as a primary residence for the child, then the parents have a taxable capital gain on their share of the sale profits, while the son qualifies for the capital gains exclusion on his share of the sale profits. Once again, if the child does not have significant taxable income (he/she was a college student after all) a capital gain exclusion for the child may be largely wasted.
The structure of the deal might be more attractive to the parents if they are the sole owners and treat the property as an investment rental. Let the parents "hire" the child as a resident property manager (management fee expense on Schedule E) and let the child sublet extra bedrooms in the property to cover all or part of the rent. The management fee paid to the child can even be used for the child's share of the rent and utilities unless the child is creative enough to get his roommates to cover the entire rent. The parents also get a depreciation expense on their Schedule E, which would not be available for a second home.
Now, when the parents sell the property, they are eligible to use a 1031 like-kind exchange to defer capital gains taxes. 1031 exchange treatment does not apply to second homes or primary residences, so use as a rental property gives the parents more options with their exit strategy.[ Edited by DaveT on Date 01/26/2004 ]
Dave...As always, great advice.
Probably the best way to treat the house for college kids is as a second home.By doing this you can deduct the interest,taxes,and insurance from your income www.tax.It's easier since most kids have a hard time asking friends for money they are owed.
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robably the best way to treat the house for college kids is as a second home.By doing this you can deduct the interest,taxes,and insurance from your income tax.MichaelChandler,
Hazard insurance is a personal, non-deductible expense for a second home. Repair and maintenance costs are personal expenses for a second home and the parents cannot take a depreciation expense for the property. A second home is not eligible for the capital gains exclusion either, so sale profits will be taxable in the year of sale.
Clearly, rental property use provides much better tax benefits to the parents.
Thanks dave for your reponse! It is always appreciated.