Buy your college kid a condo?

Make sure your kid is stable enough for this to work

Your student needs to be sufficiently responsible to collect rents, pay bills on time and take care of a property. But you also need to be reasonably sure she's going to stay put.

At some schools, as much as 30% of the freshman class doesn't return for the sophomore year. Students drop out, switch to other schools, run off with their boyfriends or girlfriends -- whatever.

That's why Cindy Kasin rejected the idea of buying homes for her three sons while they were undergraduates.

"It locked them into living in a single place for the rest of their college careers," said Kasin. "By the time they were really ready to do that, there wasn't enough time left before graduation to make it worthwhile financially."

Get enough insurance to cover your assets

If your student has roommates to help cover costs, you instantly become a landlord -- with all the liability issues that entails. If someone is hurt on the property, you can be sued.

You'll need to make sure you have sufficient liability coverage so you don't get wiped out in a lawsuit. Raising your homeowners insurance policies to the maximum liability limits and adding a so-called umbrella liability policy to boost your coverage to $1 million can set you back several hundred dollars annually. Factor in those increased premiums when you're penciling out how much this project will cost.

Understand the tax implications

You may be able to write off the mortgage interest and property taxes on a second property, just as you can on your home. But the high-income families who are most likely to be able to swing a second home are often the ones who get less of a tax break from their purchase.

That's because the tax law limits the amount of itemized deductions you can take if your adjusted gross income is over $239,950 in 2008 (for married filers).

If you collect rents, however, you should be able to deduct part of the utilities and maintenance, as well as take some depreciation on the property. Your best bet is to chat with a tax pro to get specific numbers for your situation.

Another potential downside is that any profit when you sell is subject to the 15% capital gains tax. Second homes and rental property aren't eligible for the $250,000-per-person exclusion that's available when you sell your primary residence. If you rented rooms, some of the depreciation you took will have to be given back as well.

There's a way to defer taxes if the property is a rental: You can exchange it for another rental property, perhaps one closer to home. But talk to a tax pro about the details, because these so-called 1031 exchanges have plenty of rules and require a third-party administrator to handle the swap. (For more on 1031 exchanges, see "Let Uncle Sam help fund your retirement home.")

If, instead, you decide you've had enough of being a landlord when your kid is ready to graduate -- and you're lucky enough to have some gains -- you'll just have to give Uncle Sam his due.

Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Jan. 11, 2008

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