Costco Connection - August 2006

invested in real estate you might consider gifting that property. Richard Darvis, a CPA and certified college planning specialist in Plentywood, Montana, tells of one client who purchased a single-family home for investment when his daughter was born, intending to sell it and use the profits to pay for college.

Some 18 years later she went to college in the town where the house was located, so the client gifted the house to her. Because she lived in it for more than two years, she could sell it as a personal residence rather than investment property, thereby reducing the capital gains.

Strategies for business owners and non–business owners:

Shift the tax burden

If your child’s income (from working at your business or elsewhere) equals at least half his expenses, consider removing him as a dependent from your income-tax return. Your student’s lower income could qualify him for the Lifetime Learning credit or the Hope tax credit, thereby reducing the federal income-tax liability.

Real estate

Owning and managing real estate presents several options for savings, and maybe even investment growth. You could, for example, buy a residential property near your child’s college campus and then hire your child to manage the property, says Darvis. Part of the compensation could include a place to live. Meanwhile, you’ll have the traditional tax savings associated with investment property and the possibility for appreciation.

Using any of these strategies alone, in combination with each other or in combination with cash-flow adjustments and merit aid can go a long way toward mitigating the financial burden of college—even without financial aid. Finding the best strategy for you depends largely on your family’s financial situation and the number of years you have to implement the strategy.

“Every family’s situation is different,” says Fox. “There is not a cookie-cutter approach. In addition to working with a college funding specialist, you really need to work with your tax advisor and potentially an estate attorney, since certain college funding strategies could be great for college planning, but detrimental to estate, retirement or tax planning.”

And it pays to remember that what might be your financial situation when your child is 2 could be very different from the reality 16 or more years later. So keeping plans flexible can help. C

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