Real estate is the favorite investment of many clients. This investment appreciates tax-deferred while the client enjoys the use of it. Real estate investment can play a major role in meeting college expenses. Real Estate investments are usually a long-term method of investing for college. The biggest reason why real estate is the most prevalent method of saving for college is that, for the most part, it is forced savings. A client has to make the monthly mortgage payments or lose the property.
The net equity in a family home is usually the largest college investment a client has. The equity in the home grows tax-deferred and home equity loans used for college are non-taxable. In addition, the interest expense is a tax deductible expense. As an alternative to borrowing from the home equity, a client may sell the home, usually the gain is tax-free, buy a less expensive home, or rent, and use part of the proceeds to fund college.
Rental Real Estate
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.
Undeveloped land, such as vacant lots or farm land, will appreciate on a tax-deferred basis. The land can be gifted to a child to be used for college costs. The sale of the land will generate funds for college, and the child will pay capital gain rates on the taxable income.