College-area properties get good grades |
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Graduation present: sound credit
In retrospect, Sheehan says, he should have put his daughter on the deed as a co-owner. "That's the one mistake I did make, that I didn't buy it with her. It would have helped, although it didn't slow her down."
Sheehan's not alone in that oversight. Few parents think of buying a home with their student instead of for them. But that choice pays several benefits, according to real estate attorney Andy Sirkin of Sirkin Paul Associates in San Francisco.
"With their name on the title, it creates a credit history for them. If the student is working and generating taxable income, then some tax benefits would accrue to them that they wouldn't have if they were paying rent. And they might be able to exempt the capital gain on the resale if the student lives there for two of the past five years before they sell it," Sirkin says.
Kyle Krull, an estate planning attorney in Overland Park, Kan., says co-owning their own college home gives students a jump-start in the Monopoly game of life.
"The more hard assets you have on your financial statement, the more you have the ability to seek financing for your own business ventures, your own personal financing for a home or other investment property," he says. "The parents can then sell the remaining interest to the kids over time, and now the kids have one or two properties in a college town that are income-producing. In addition to their graduate degree, they're now landlords."
Pooling parental resources
Sirkin says some parents choose to share the cost, risk and, ultimately,
the reward by co-owning a college house with other parents. In cases
where more than one child will be attending school in the area,
this can extend the time horizon on their investment and still meet
the residency requirement to avoid capital gains tax when they sell.
"They would expose themselves to lower costs and fewer risks than if they bought the house by themselves, because they would be investing less," he notes.
Although some parents may be tempted to form a business entity such as a limited liability company with their child or partner(s) to isolate their personal assets from the rental property, Sirkin advises against it. A garden-variety LLC as a business entity cannot claim the capital gains exclusion on the sale, nor execute a 1031 exchange for like property, such as a rental home near a different campus.
"The most important thing we're doing is establishing co-ownership with the child, because that's what is generating the benefits," Sirkin says.
Has buying a campus home worked well for Sirkin's clients?
"Yes, because of the truism that real estate tends to increase in value over a reasonable period of time," he says. "In a university town, that's probably even slightly more likely than average. I think it works out well for people compared to renting, for the most part."
Jay MacDonald is a contributing editor based in Texas.
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