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Housing is expensive. I live in a neighborhood of townhouses and single family homes, and for the life of me, I can’t figure out how some of these families can afford these houses. While I walk my dog through the neighborhood, I admire these homes with luxury cars parked outside and perfectly manicured lawns, and I always wonder what these people must do for a living. Do you ever look around and try to figure out how some people afford their homes? Maybe it’s because some of these people are buying a house with parents.
Let me first start out by saying that I live in the Washington Metro Area, or WMA as it’s known locally, which has a median income of $91,193 and a family income of $105,854. The median home price in the area is $511,700 according to Zillow. That’s more than five times the median person’s salary, which is obviously very high.
Unfortunately due to the high cost of living, I was priced out of the market when I graduated from college. My parents graciously offered to let me live with them for a couple years so that I could save money to buy a house. When I first started looking for a home in 2003, everything seemed out of my price range, and the homes that were in my price range were much farther outside of the city. I wasn’t interested in sitting in traffic for hours each day. So what was I to do?
My Parent’s Generous Offer
One day I got a call from my parents while at work. They said that they had been to an open house and found a great place for me. As crazy as this seems now, my company didn’t have access to the internet. So I was unable to look up the house until I got home. When I finally looked at it online, I thought, “How in the world could I afford this?”. When I called them, they made a proposition that I couldn’t refuse.
They said they would be willing to go in to buy the home with me in exchange for partial equity in the home. At the time, I thought this was perfect. I had the opportunity to live in a home where I could gain equity through appreciation and principal payments and rent out the rooms to friends. And in turn, my parents would be able to diversify their portfolio through rental income and appreciation in the home.
Pros (for me)
Let me first start out with some of the benefits that I have had while living in this property.
- My roommates’ rent payments essentially paid the monthly mortgage bill. Over the years, this has resulted in tens of thousands of dollars, which was a great passive stream of income.
- Since my roommates were basically paying the mortgage, I was able to put additional money down towards paying off the mortgage faster.
- I have been able to live in a home that I wouldn’t have been able to afford on my own. I realize everyday what a blessing that is.
Cons (for me)
Now, here are the downsides about living in a co-owned property from a tax perspective.
- If you live in the residence, you cannot, per IRS regulations, claim a rental loss on your property. Any depreciation or losses will be rolled forward until you sell your home.
- Once you sell the home, you will not be able to claim the homeowner’s exclusion of up to $250,000 if you are single and $500,000 if you are married, if you have lived renters for more than three out of the last five years.
- If you have roommates living in the home, you must allocate your mortgage interest one of two ways:
1. You can calculate the mortgage interest by dividing the total number of people living in the home.
- E.g. You own the home and live in the home with three other roommates. This would mean 25% (the owner living in the home out of four people living in the home) of the mortgage interest is allocated towards your mortgage interest deduction on your Schedule A tax form. Therefore the remaining 75% (three roommates out of four people living the home) would be applied to rental expense on your Schedule E tax form.
2. You can divide by the square feet that the owner and renters have access to the home.
- E.g. You own the home with 3,000 square feet. You occupy 2,000 square feet, and the renter occupies 1,000 square feet. Therefore, you would be able to claim 66.7% (the 2,000 square feet you occupy divided by 3,000 total square feet) of the mortgage interest on your Schedule A. The remaining 33.3% (1,000 that the renter occupies divided by 3,000 total square feet) will be allocated on your Schedule E tax form.
This second option is usually done if you have a basement apartment or an attic dwelling space separate from the rest of the home.
My Feelings Towards It
So would I do this again? Absolutely, it’s been a great investment for me as the house has appreciated since 2004 with no outstanding mortgage. I’ve also had hands-off parents that haven’t micromanaged the home, which has really made for a wonderful experience. Is this the right decision, or even feasible, for everyone? Probably not. But if you have kind (and sane) parents willing to buy a property with you, I would recommend it.
Would you consider owning a property with your parents or children? Why or why not?