Q: How should I structure buying a house for my daughter who will be going to Colorado State University? Loan payments seem to be less than rent.
A: I was approached by a reader at the grocery store who said she enjoyed the column but thought I was much too humorous and my column should reflect a much more somber and sober tone. So here it goes.
This time of the year I am asked your question a lot. Whether real property is being purchased with a relative, a friend, or just as an investment, the following are several points to consider when one party is advancing most or all of the down payment while also contributing his or her credit worthiness to secure the loan.
First, you should go on title with your daughter. In fact, some lenders will require you to do so.
If you are not named on the deed and if your daughter stops making payments to you, then you are forced to make the payments yourself to protect your credit standing. And even worse, you have no quick ways of either forcing her to start paying (there is no standing for a traditional eviction), and at the extreme, she could quitclaim her ownership to an innocent buyer, taking the money for herself.
Yes, you could go through a court suit and with proper documentation and several years later with attorney's fees having been paid, stand a chance of winning, but would that be a wise option?
With you on the title, you could share any appreciation, gain perhaps a depreciation deduction, and possibly deduct interest. Depending how your CPA structures the accounting, part of the house could actually be rented out, thus producing an income stream flow.
Your daughter would benefit by being on title because she would be strengthening her credit history and when the property is sold, she could shelter up to $250,000 of her share of the appreciation from capital gains taxation after living there for two years (not to mention having an incentive to maintain the place).
But a negative for you as owner (or co-signer or guarantor) is that this obligation will be reflected on your credit report, perhaps making it harder to qualify for future loans.
What about the title? It is not necessary to hold title 50/50. If your daughter contributes 10% of the down payment, then in Colorado, title can be held 10%/90%.
If you wish your daughter to gain the entire ownership if something happens to you, then title should be set up in joint tenancy with right of survivorship. If you want to treat all the children the same, including your portion of the equity, then title should be set up as tenants in common, perhaps giving your daughter in your Will the opportunity to purchase your share of the house.
If your daughter did not contribute her full share, the difference could be deemed a gift and if it exceeds $11,000, then the appropriate gift tax forms should be filed to avoid paying about 50% (both state and federal) of the excess as gift taxes (above the amount you already put up for her!).
Another way to handle your excess contribution would be to have her sign a promissory note. She then can begin to repay you or you can forgive $11,000 of the note each year. (Check with your CPA about imputed interest problems.) The note would also help establish the amount of the "loan" and would be used to balance out the estate with your other kids, if we should loose you and if you wanted to treat everyone the same.
So many points to make and so little space. I must stop and suggest that you consult with your attorney and your CPA concerning these and other issues.