Better to rent condo to daughter or put her on title?

Question

We're contemplating purchasing a small condo in MI for our daughter to live in while she goes to law school. This would be an all cash purchase, so no mortgage. If daughter is listed as a co-owner, we can save about $100 per month on property taxes. She would pay for the HOA dues, insurance and property taxes, which would still be cheaper than renting a similar unit; and we would have no expenses after the initial purchase of the unit.

However, is it better to not have her as an owner, but rent the unit to her, and then be able to deduct taxes/HOA/insurance (but also have to claim rental income)?

Answer 1

Obviously you have done well financially in order to be able to purchase a condo for cash, presumably, without risk of your other obligations. To put things in perspective, we are probably talking about less than $5,000 in tax savings.

If she is on the title then she is a co-owner. Are you okay with that? You would essentially be giving this child a 50% stake in a property without compensation. Will your other children be okay with it?

As your question stated you would prefer to not have her as an owner.

However, is it better to not have her as an owner,

So I would buy the condo without her on the title and just pay the extra $100 per month in property tax. It is probably "small potatoes" in comparison to your net worth.

I would also only charge her at most your cost of carrying the property as rent. While you will create income all of it (and probably more) could be written off as costs. There should be no income tax burden created from this situation. Your accountant can help with any paperwork that needs to be filed.

Answer 2

@Pete B.'s answer is good, but there's an important note to consider for tax purposes. It's too large for a comment, so I'm adding it as an answer.

And that is: you cannot claim the property as a rental property under certain conditions. This affects things like claiming mortgage interest (which you don't have), and depreciation in value (which a rental is allowed).

See IRS topic 415 for details, but I've included an important excerpt below with emphasis added:

If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:

• 14 days, or
• 10% of the total days you rent it to others at a fair rental price.

... A day of personal use of a dwelling unit is any day that it's used by:

• You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home and the other owner pays a fair rental price under a shared equity financing agreement
• A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price
• Anyone under an agreement that lets you use some other dwelling unit
• Anyone at less than fair rental price

Talk to a tax accountant to better understand the ramifications of this, but it's worth noting that you can't just rent it to her for a paltry sum and be able to take tax advantages from this arrangement.

Answer 3

By placing the property in her name, her share of it would also be considered an asset of hers should she ever be sued. If she gets married and later divorced, depending on if Michigan is a community property state or not (and a lot of other things), her ex might get 50% of her stake in the property.