Rental real estate, such as an apartment building or a commercial building can be used to fund future college costs. In the early years of the real estate investment, the client can take advantage of the tax losses generated by the investment, and in later years when the investment starts generating taxable income the client can gift the investment to children. The children will pay tax on the income and the rental income will be a source of college funds.

Specific Details

Mom gifts a 10% interest in her rental real estate to her daughter and subsequently leases it back for $200/month (a reasonable rate determined by checking with a rental service). Since Mom is in a combined 38% tax bracket (32% federal and 6% state), shifting $2,400 per year in flow-through income from the rental real estate will generate a $912 tax savings per year.

Potential Savings

If you are in a combined (federal and state) tax bracket of 35% and your childs tax bracket is 0%, you could reduce your taxes up to $350 for every $1,000 of rental real estate income you could shift to your child.