Learn about financing college using real estate. This presentation shows forms for setting up your ownership and the tax implications. Go to www.zerocollegedebt.com for more information.
- 1. Co-ownership and Shared Equity arrangements The Zero College Debt Program
2. The Zero College Debt Program
- In the Zero College Debt Program, we recommend that students purchase property in their college town to reduce costs, generate an income and get tax advantages.
- Many families ask about how the ownership of the property should be structured.This presentation will help you understand some of the aspects how the ownership should be set up.We always recommend that you work with a CPA to help you make the right decisions for your family to maximize your savings.Here is Kevin Ruff, CPA to talk withyou about some of the decisions to be made and how they will impact you and your finances.
3. What is co-ownership?
- When relatives purchase with other relatives, the occupant-relative can own a % of the property and the non-occupying relative can also own a %.
- We will explore the different co-ownership possibilities and advantages for you and your child.
- What % ownership is necessary to qualify as an active investor?
4. What is co-ownership?
- Co-ownership arrangements allows both parties to take advantage of tax deductions.Disclaimer: you should work with your CPA or tax advisor to get the best decisions for your situation.This is a general presentation on the concept, not individual advice on your situation.
- The maximum allowable tax deduction for investment properties is $25,000/ year.
- How do you participate in this?
5. Co-ownership Rules
- Rules to qualify for the investor/relative to take tax deductions associated with the rental property:
- The dwelling must be the principal residence of the renter (relative).
- The renters must pay a fair market rent if unrelated to the co-owner investor. (in our examples the renter is related)
- The investor/ relative must own at least 10% of the property to qualify for tax deductions.
- The relative investor must make material decisions related to the rental and repairs of the property.
6. Example 1: 50-50 ownership Example used for illustration only Home shared with renters @ $400 each *3= $1,200/mo Depreciation based on $160,000 improvements/27.5 yrs=$5,842.40/yr *.75 Income shared by parents and student, reflected in Taxes. Purchase home $200,000 Combined amounts Childs share if 50% ownership Parents share if 50% ownership Purchase Price $200,000.00 $100,000.00 $100,000.00 Down payment 10% $20,000.00 $10,000.00 $10,000.00 Mortgage Loan 90% $180,000.00 $ 90,000.00 $ 90,000.00 Mortgage Payment (PITI) $1,373.86 $686.93 $686.93 Actual collected rent $1,200.00 $600.00 $600.00 Total mo. out of pocket cost $173.86 $86.93 $86.93 Note: 7. Example 1: 50/50 ownership Purchase home $200,000 Combined amounts Childs share if 50% ownership Parents share if 50% ownership Less Tax Deductions:Yearly Interest on mortgage $10,740.00 $5,370.00 $5,370.00 Taxes on property $2,000.04 $1,000.02 $1,000.02 Insurance on property $600.00 $300.00 $300.00 PMI $936.00 $468.00 $468.00 Repairs $1,200.00 $0.00 $1,200.00 Miscellaneous $800.00 $0.00 $800.00 Depreciation -student can only claim 75% depreciation of 50% $5,842.40 $2,190.90 $2,921.20 Total Tax Deductions $22,118.44 $9,328.92 $12,059.22 Minus rent collected -$7,200.00 -$7,200.00 Estimated Annual Deductions $2,128.92 $4,859.22 8. Example 2: 10% Parent Ownership Example used for illustration only Home shared with renters @ $400 each *3= $1,200/mo Depreciation based on $160,000 improvements/27.5 yrs=$5,842.40/yr Purchase home $200,000 Combined amounts Childs share if90% ownership Parents share if 10% ownership Purchase Price $200,000.00 $180,000.00 $ 20,000.00 Down payment 10% $20,000.00 $18,000.00 $2,000.00 Mortgage Loan 90% $180,000.00 $ 162,000.00 $ 18,000.00 Mortgage Payment (PITI) $1,373.86 $1,236.47 $137.39 Actual collected rent $1,200.00 $1,080.00 $120.00 Total mo. out of pocket cost $173.86 $156.47 $17.39 9. Example 2: 10% Parent Ownership Purchase home $200,000 Combined amounts Students share if 90% ownership Parents share if 10% ownership Less Tax Deductions:Yearly Interest on mortgage $10,740.00 $9,666.00 $1,074.00 Taxes on property $2,000.04 $1,800.04 $200.00 Insurance on property $600.00 $540.00 $60.00 PMI $936.00 $842.40 $93.60 Repairs $1,200.00 $0.00 $1,200.00 Miscellaneous $800.00 $0.00 $800.00 Depreciation(student can only take 75% of 90%) $5,842.40 $3,943.62 $584.24 Total Tax Deductions $20,657.84 $16,792.06 $4,011.84 Minus rent collected -$14,400.00 -$12,960.00 -$1,440.00 Estimated Annual Deductions $6,257.84 $3,832.06 $2,571.84 10. What is the impact of this change?
- When the parent owns only 10% of the property, they can still claim deductions against the property up to $25,000/year.
- This is all dependent on the parents tax bracket and total AGI.
- If combined income is over $150,000, this deduction is phased out.
- It is important when you set this up that you look at all your potential deductions and maximize your benefits.
11. Example 3: 100% student owner Example used for illustration only The parents are the co-signor on the loan and own no part of the property for tax purposes . Student takes in renters (if 4 BR, take in 3 renters and generate an income).Est. $400/renter Purchase home $200,000 Tax implications Purchase Price $200,000.00 Down payment 10% $20,000.00 Mortgage Loan 90% $180,000.00 Mortgage Payment (PITI) $1,373.86 Actual rent $1,200.00 $400*3 = $1200 Income Total mo. out of pocket cost $173.86 Depreciation $5,842.40/yr est.$160,000/27.5 *.75 =$4,381.80 12. Example 3: 100% student owner Purchase home $200,000 Total expenses and deductions Allowed Deductions Tax implications Less Tax Deductions:Yearly Interest on mortgage $10,740.00$10,740.00DeductibleTaxes on property $2,000.04$2,000.04DeductibleInsurance on property $600.00.75 * 600 = $450.00Proportional deductionPMI $936.00$936.00May be deductibleRepairs $1,200.00.75*1200= $900.00Proportional deduction Miscellaneous $800.00.75*800= $600.00Proportional deduction Depreciation@ 75%-student cannot depreciate portion they use.$5,842.40 $4,381.80Proportional deductionMinus Rents -$14,400.00 - $14,400.00 Income Estimated Annual Deductions $7,718.44 $5,607.84 13. Putting a contract in place
- We recommend that you sit down with your child and draw up an agreement.As part of our program, we will provide you with a sample document that you can use to craft your agreement. This is ONLY provided when you are ready to purchase a property through one of our affiliate REALTORS. As always, we recommend you confer with an attorney and your CPA to determine the best structure for your situation.
- Go to:http://www.zerocollegedebt.comand sign up today!
- Maximize your tax advantages and help your child learn about investing and managing money:This is Real Life Learning they can use for the rest of their lives to build wealth!
14. Key elements of contract
- Ownership interest (% ownership)
- Responsibilities and restrictions
- Right to sell ownership interest/buy out price
- Division of profits from property sale
- Deposits, reserves, replacements, repairs, maintenance
- New owners obligations under agreement
- Default terms and language
- Signatures and agreement to be bound by contract
15. Contact Information:
- The Zero College Debt Program
- http://www.zerocollegedebt.comand go to Sign Up
- Developed in cooperation with: Kevin Ruff CPA, Greenville, SC
- Thank you for your participation.
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