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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)?

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    "If daughter is listed as a co-owner, we can save about $100 per month on property taxes." - why would that cause the property taxes to be reduced?
    – Joe Strazzere
    Commented Apr 5, 2017 at 21:07
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    @JoeStrazzere Presumably because they'd qualify for a property tax credit which requires the home be the principal residence of the owner?
    – Joe
    Commented Apr 5, 2017 at 21:29
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    Someone has removed the California tag from your question. Do you live in California? If so, please update your question to indicate this explicitly and restore the tag, as this would make California law relevant.
    – jpmc26
    Commented Apr 5, 2017 at 21:33
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    One thought I haven't seen mentioned so far (and not sure how applicable this is as her primary residence) is that with most assets there is an additional element of risk when there are more owners. Consider if your daughter was sued, perhaps following a car accident. Would you be at greater risk of losing the condo if she were on the title then? Also, what liability would she have as an owner vs. a tenant if someone were injured on the property? Unlikely scenarios, I know, but perhaps worth considering.
    – Wesley Marshall
    Commented Apr 6, 2017 at 4:33
  • Depending on your desired outcome, consider renting it to daughter at market rate, but banking all the rental for her. Kind-of enforced saving.
    – Criggie
    Commented Apr 6, 2017 at 6:45

3 Answers 3

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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.

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    cost of carrying the property--the largest of which is usually depreciation, so don't forget it!
    – chrylis -cautiouslyoptimistic-
    Commented Apr 5, 2017 at 20:11
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    The "Problem" with using depreciation to reduce taxable income is that when you sell the property you will likely have a capital cost recapture - a potentially large amount and all in the same tax year, which could more than wipe out the tax savings you had in the previous years an bump you into a higher bracket. Not necessarily, but be aware.
    – user45554
    Commented Apr 5, 2017 at 21:32
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    I don't see anything in the question (current or previous versions) that indicates that the OP prefers not to have her as an owner.
    – jpmc26
    Commented Apr 5, 2017 at 21:34
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    Somebody who's going to law school usually isn't a child any more.
    – David Richerby
    Commented Apr 6, 2017 at 12:50
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    @DavidRicherby I didn't notice that I stopped being my parent's child (read: son/daughter) the day I started university.
    – Federico
    Commented Apr 6, 2017 at 13:03
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@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.

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    As an aside: depending on the fair rental price, you could gift her the money, have her pay it to you as rent, then treat the property as a rental. But you'll need to consider the IRS rules and limits for gifts.
    – Jimmy
    Commented Apr 5, 2017 at 20:59
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    I should think the more important point to bold would be the one referring to use by a family member.
    – Ben Voigt
    Commented Apr 6, 2017 at 6:05
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    @BenVoigt It still has the same clause about paying a fair rental price. In the end, my interpretation is that anything less than that sum would be considered personal use and not rental property; however, they clearly call out the family case, so that there is no ambiguity between family vs. strangers.
    – Jimmy
    Commented Apr 6, 2017 at 6:39
  • @Jimmy Gifting someone money just for them to pay it back to you doesn't reflect any economic reality, so it wouldn't change the status of the property for tax purposes. The status of the property is based on the underlying economic reality, not how you choose to characterize it. It would be different if they had previously been gifting her some amount of money and maintain that level less the fair market value of the rent. You can't create two transactions that cancel each other out just to get tax benefits from one of them unless they reflect some economic reality.
    – David Schwartz
    Commented Apr 6, 2017 at 11:27
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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.

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