| Condo investment-2nd home vs rental |
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GOODOFF
First Time Poster
Cash: $ 0.00
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Joined: 11 May 2004
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| Condo investment-2nd home vs rental |
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Advise on condo investment.........
I am at 40% State & Fed Tax, my son goes to college (out of town) and needs student loan to pay for college. I want to buy a 3-br condo for him to live near campus, rent payment will cover the mortgage.
1. Do I classify it as second home or rental property?
2. If I add my son's name in the ownership title, he may not qualify for the student loan?
3. If I add my son as owner, thus I can sell the condo after 4 years and do not have capital gain tax (owner occ.)? He can use the profit to pay off the student loan.
What is the best for this situation? 
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Tue May 11, 2004 2:55 am |
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Andrew
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Location: Texas
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Hi GOODOFF,
That sounds like a great plan as your sons roommates will pay the mortgage like you mentioned, assuming the rent gets paid on time. You need to find out if putting the title in your son's name really will affect his qualifications for the student loans. I think to avoid the capital gains tax the owner must occupy the house for a minimum timeframe which may be 2 years, if I recall correctly. As long as Jr. stays put at least that long your plan for saving taxes there should work. A final note, college boys are notorius for being quite hard on a property with the occasional party or informal wrestling match (happens more than you might imagine!), but with your son looking out for your interests that shouldn't be too much of an issue.
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Fri May 14, 2004 1:24 pm |
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Euler
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Joined: 06 Nov 2003
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Goodoff, that sounds like a great plan. My little ones are shooting up faster than I imagined. I'm reading your strategies and taking notes.
I was going to say some'n about property and college weekends, but Andrew beat me to it and I'm sure you knew it anyway.
If you were audited, I bet they would classify it as a second home, no matter what was said, as long as the lease is in your son's name.
Your plan accomplishes great things after your son graduates. I loved reading that part. But let's look at the risks for a sec.
What if the condo loses value over four (or six for that MBA) years? What is the worst that could happen? The property may be unsellable due to circumstances outside your sons control - bad neighbors, rezoning - you know, the typical real estate risks.
Be certain as possible of the projected value of the property. If you know the area, great. If not, talk to a real estate agent or someone else who is. Your plan relies on an accurate projection over 4 to 6 years. Also, have a backup plan.
Best of luck to you! Come back and keep us posted, I'm taking notes for when my little ones launch!
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Fri May 14, 2004 3:21 pm |
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REI Houston
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Joined: 16 Mar 2004
Location: Houston, TX
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Another way to go about this is to hold title to the property in an entity other than your or your son's names. Depending on the state you live in, the structure might change. Texas has a 15% franchise tax for LLC's, so here, to minimize the tax liability AND legal liability (accidents, damages, etc.) it makes sense to create an LLC and form a partnership with that LLC as the general partner, and the LLC having 1% ownership in the partnership. You, and possibly your son, owning the other 99%. In this scenario, the LLC would be liable for any claims of damages and only the assets that the LLC holds (in this case only the rental property) would be exposed to claims.
In this case, the property would clearly be a rental property. If you decide to sell it at the end of your son's time at college, there is a 1031 exchange to defer the taxes on the profits. 1031 refers to the section of the IRS code that gives investors 6 mo.'s from sell of the first property to buy another investment property. In theory, and in most cases of reality, taxes on the sell of property can be defered indefinately. Additionally, you can depreciate the property to generate phantom losses for the tax year. Depreciation is recaptured at sell, but again, defered.
If your son was to be included in ownership of the property, it would make sense for him to be on the loan. This balances the asset of the property, and further helps establishing his credit rating.
As always, please consult liscensed legle and tax professionals in your state. Your milage may vary, and probably will. Good luck!
Jerel
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Mon May 17, 2004 6:21 pm |
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