Real Estate May Be Key to Tuition

Posted on November 14, 2017 by

The location and value of your New York apartment may turn out to be the key to your children’s or grandchildren’s private school, college or graduate school tuition. Moving to a new location or to a smaller apartment may make it possible to cope with the high price of a quality education.

Tuition at private schools approaches $20,000 per year. Ivy League college tuition, room and board exceed $30,000 a year, and a medical school education at a top school may exceed $40,000 a year. While many families turn to loans or grants, not all children are eligible, and many families would prefer to have their children begin their careers debt-free.

From a tax point of view, the law allows each family to realize real estate gains up to $500,000. Also, money invested in a child’s education goes untaxed, whereas inherited wealth remains heavily taxed.

Many grandparents may be at a stage of life where contemplating a move to warmer climates with less expensive real estate enables them to provide a living legacy through funding their grandchildren’s education. The large apartment they wisely purchased for little money years ago may now be worth a king’s ransom.

When several children have gone off to college or graduate school, a nine-room apartment that has appreciated in value may be much larger than needed. The capital gained from its sale may get its highest rate of return through investments in education, tutoring, educational experiences for young people or diversification to other forms of investment. No need for a student loan.

For example, Stacy and David have a sophomore son at the University of Pennsylvania, twin 17-year-old girls who have gotten early acceptance to the University of Michigan, and another daughter at Georgetown. Stacy and David are both lawyers and their combined income is $310,000, and next year they face tuition expenses in excess of $100,000. They used to live in a nine-room apartmentĀ on Park Avenue that Stacy inherited from her grandmother 20 years ago and that was recently valued at $4.2 million. Their maintenance and mortgage totaled $90,000. By moving to a six-room apartment, they were able to gross $2.5 million, of which $500,000 is not taxable anymore.

In the past years, many brokers have been asked to appraise apartments for families that are trying to realize the recent gains that have accrued in this extraordinary market. But there is no guarantee that the current high prices paid for luxury apartments will last. Recent prices might be at their peak, especially given the stock market’s bear performance over the past year. Past declines in the stock market have often been followed by declines in real estate values in New York over periods of several months or years.

Most financial advisors recommend diversification as a protection against market instability. For an investor whose apartment represented one-quarter of his net worth five years ago, he or she may now discover that it represents 80 percent. The investor might want to move to a smaller apartment, thereby unlocking value from a real estate market that may be at its peak, in order to invest in other things, such as education.