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Locate A Tax Shelter Near A School

Will your child be packing up soon to go to college?  If he or she doesn't have a place to live on campus, you might take advantage of a unique tax-saving opportunity.

If you can afford the cost, you could acquire an apartment building near the school and let your child live in one unit while you rent out the others.  If it's a sound investment, you'll make money in the long run, especially if you eventually sell the building at a profit.  What's more, your current income from tenants may be subject to favorable tax rules—as could a future sale of the property.

Rental income is taxable, but it may be offset by deductions for expenses such as mortgage interest, property taxes, maintenance, insurance, and other costs, and you also can take a generous depreciation allowance.  In some cases, you even may be able to deduct a loss from the rental activity, although this is complicated by "passive activity loss" (PAL) rules.

Those rules stipulate that losses from passive activities incurred during a tax year generally can't exceed your annual income from passive activities.  For instance, if you have a passive interest in a business, the income from the business may soak up a loss associated with real estate that you own, but no more.

Rental real estate is treated automatically as a passive activity (unless you're a real estate professional), but you may qualify for an exception.  A PAL from rental real estate may offset up to $25,000 of nonpassive income from other sources (wages from a job, for example) if you actively participate in the activity.  To qualify, you have to be involved in making management decisions for your property—arranging leases for tenants, supervising repairs, and so on.  The $25,000 allowance is phased out for an adjusted gross income (AGI) between $100,000 and $150,000.

Suppose your AGI is $100,000 and you buy a duplex near your child's campus.  Your child lives in one unit and you rent the other to another student.  For simplicity, we'll assume that your first-year depreciation deduction under the IRS tables is $10,000 and you incur $20,000 in deductible expenses.  You charge the student $1,000 per month, the going rate in the neighborhood, so you're showing an annual loss of $18,000 ($30,000 minus $12,000).  Based on your AGI, you can use the entire $18,000 loss to offset highly taxed income.

After your child graduates, you may decide to sell the place. Icing on the cake:  The maximum long-term capital gain rate is only 15% or 20% if you're in the top income tax bracket.  Overall, it's a pretty good deal.



INDEX
  • How To Spell Estate Tax Relief
  • One Last Shot At A Tax Exemption
  • 5 Ways That Can Help You Pay For Higher Education
  • Seven Smart Money Moves You Should Make In 2017
  • Sticking With The Fundamentals
  • 17 Midyear Tax Moves You Still Can Make In '17
  • A Quick Overview Of Preferred Securities
  • Weigh Five 401(k) Options When Leaving A Job
  • Locate A Tax Shelter Near A School
  • How To Improve Chances For College Financial Aid
  • What Would You Do For A Bigger Salary Or More Benefits?
  • 7 Late Moves To Cut Taxes This Year
  • Seven Good Reasons To Create And Fund A Trust
  • A Good Time To Remember How Long-Term Investors Must Think
  • Remember The Lesson Of Rebalancing
  • Section 529 Plans Keep Getting Better And Better
  • Three Ways You Can Play Good Stock Market Defense
  • When Can You Reconvert To A Roth?
  • 8 Compelling Tax Reasons For Roth IRA Conversion
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  • Rising Housing Prices May Be Sign That New Bubble Is Forming
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  • Identity Theft: Everyday Prevention
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  • Identity Theft: Tips to Protect Yourself
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  • Section 529 Plans Are Popular But Not The Only Way To Go
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  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
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  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
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  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • REITs: A Great Diversification Investment
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • Estate Tax Will Be Reduced Gradually, Then Repealed in 2010



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