If your child is in college, he or she may be planning to move off-campus at some point. At the same time, you could be looking to buy real estate to shelter your income.
Here’s how to kill two birds with one stone:
Strategy: Buy real estate property near the school, and rent a unit to your child. This provides reliable off-campus housing for your child and, for you, it’s a tax shelter that will probably appreciate in value.
You can even write off the cost of visiting your child at college. When you eventually sell the property, any long-term gain will be favorably taxed at the long-term capital gains rate (currently no more than 15 percent or 25 percent for gains attributable to depreciation write-offs).
Offset rental real estate income
Don’t wait any longer if this strategy meets your needs.
As with other rental real estate investments, the rent you receive from your tenants, including your child, is included in your taxable income. But you can offset the income with deductions for mortgage interest, property taxes, maintenance, insurance, etc., as well as claiming a big on the property’s purchase price. (It takes 27.5 years to fully recover the cost of residential rental real estate.)
Best of all, you may be able to use losses from the rental activity to shelter your highly taxed ordinary income.
Cozy up to PALs
If you end up with a tax loss (rental deductions in excess of rental income), a potential tax trap exists. Under the “passive activities” rules, your rental activity losses generally can’t exceed your positive passive income from all your passive activities.
Key exception: You can use passive activity losses (PALs) from rental real estate to offset up to $25,000 income from all sources, if you actively participate in the rental activity (i.e., making decisions, leasing units, supervising repairs).
The $25,000 related real estate allowance phases out for an AGI between $100,000 and $150,000. It disappears completely for an AGI higher than $150,000.
Tip: If you need to inspect the premises or have minor work done, combine the trip with a visit to your child. You can deduct the travel costs so long as the trip’s primary purpose is to handle real estate matters.