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Can you use a 529 account to pay college living if you own it?
Posted on 8/8/16 at 11:46 am
Posted on 8/8/16 at 11:46 am
The wife and I are looking ahead to when the little one goes off to college. We discussed whether it was worth it to buy a condo for the future student to
1)Save on future boarding costs
2)recoup some of the money invested in the 529.
The idea goes like this- we save up money in 529 for little NYNOLa to go to college. We save away enough for both room, board, books and tuition. We purchase a condo for student to live in and charge rent accordingly, maybe with an additional roommate or 2. Would I be allowed then to essentially make 529 distributions to myself for the market rate of the living expenses? Additionally would I be allowed to write off the cost of the mortgage interest and taxes as a deduction?
This seems like a much cheaper and possibly profitable solution to simply paying dorm fees or rent to someone else.
Thanks all
.
1)Save on future boarding costs
2)recoup some of the money invested in the 529.
The idea goes like this- we save up money in 529 for little NYNOLa to go to college. We save away enough for both room, board, books and tuition. We purchase a condo for student to live in and charge rent accordingly, maybe with an additional roommate or 2. Would I be allowed then to essentially make 529 distributions to myself for the market rate of the living expenses? Additionally would I be allowed to write off the cost of the mortgage interest and taxes as a deduction?
This seems like a much cheaper and possibly profitable solution to simply paying dorm fees or rent to someone else.
Thanks all
.
4
Posted on 8/8/16 at 11:53 am to NYNolaguy1
I'm not a tax pro, so take this fwiw...
You won't be able to make the distributions straight to yourself. For tax reasons, your child would have to "pay" you rent using the 529 disbursement and you would have to claim it as income. So, there has to be some form of transaction that takes place.
Also, I believe there is a max amount per month that can be distributed from the 529 for rent. Each school/market is a different amount. Keep that in mind if you expect the 529 distributions to cover the whole mortgage payment.
You won't be able to make the distributions straight to yourself. For tax reasons, your child would have to "pay" you rent using the 529 disbursement and you would have to claim it as income. So, there has to be some form of transaction that takes place.
Also, I believe there is a max amount per month that can be distributed from the 529 for rent. Each school/market is a different amount. Keep that in mind if you expect the 529 distributions to cover the whole mortgage payment.
This post was edited on 8/8/16 at 11:55 am
Posted on 8/8/16 at 11:59 am to TheChosenOne
The off-campus room & board cannot exceed the cost of on-campus room and board. I believe the schools set that amount each year.
Posted on 8/8/16 at 12:00 pm to TheChosenOne
quote:
You won't be able to make the distributions straight to yourself. For tax reasons, your child would have to "pay" you rent using the 529 disbursement and you would have to claim it as income. So, there has to be some form of transaction that takes place.
Yeah I figured something like that would take place. Let's say I charged market rent and created a lease. The 529 for my child would cover his portion of the rent up to some school determined limit. I am guessing it would also indemnify me if I got audited. Also I realize that I would be recouping fractions of what I distributed- for example if living costs were $4k and tuition/books/food were $6k, then obviously I would be getting back $4k on the $10k distribution.
The appeal to me was recouping some of the money in a situation that otherwise would have disappeared entirely.
Posted on 8/8/16 at 12:12 pm to NYNolaguy1
quote:
This seems like a much cheaper and possibly profitable solution to simply paying dorm fees or rent to someone else.
Then there's probably something in place to prevent people from doing something like this.
Posted on 8/8/16 at 12:19 pm to The Spleen
quote:
Then there's probably something in place to prevent people from doing something like this.
My thought was that most people don't have the cash upfront to buy new property and pay for college.
But if you can fund it with pre-tax dollars through a 529, that makes a big difference. My other guess is that most people haven't thought it through.
I haven't found anything that says you cant do it though.
Posted on 8/8/16 at 12:25 pm to NYNolaguy1
So you are choosing where your kid will go to college already?
Posted on 8/8/16 at 12:35 pm to achenator
quote:
So you are choosing where your kid will go to college already?
No. There's at least 18 years before that happens.
Posted on 8/8/16 at 1:15 pm to NYNolaguy1
Setup an LLC and put the property in the LLC. Have your kid right a check every month to the LLC using funds from the 529.
Posted on 8/8/16 at 1:36 pm to NYNolaguy1
quote:
My thought was that most people don't have the cash upfront to buy new property and pay for college.
Honestly it sounds like a shell game with not much benefit to you, with some potential risks. You can pay for all legitimate college expenses with 529 funds, including rent. You can also deduct property tax and mortgage interest on a 2nd home. However if you're renting the property, you would have to report that on your tax return on Sch E. That moves the property taxes and mortgage interest, plus other expenses, over there too to offset that income. And renting to a related party also opens another can of worms with the IRS if it's rented for less than market value.
I don't really understand the scenario though. You asked about mortgage interest in the OP, then said most people don't have the cash upfront to pay for a condo and college. It sounds a little shady to me, and maybe not worth the risk. I'm pretty conservative though on these issues, so take FWIW.
Posted on 8/8/16 at 1:43 pm to The Spleen
quote:
I don't really understand the scenario though. You asked about mortgage interest in the OP, then said most people don't have the cash upfront to pay for a condo and college. It sounds a little shady to me, and maybe not worth the risk. I'm pretty conservative though on these issues, so take FWIW.
Fair enough. The situation above is almost two decades away, so in all likelihood won't happen anyway. Thanks for all the pointers
.
Posted on 8/9/16 at 8:33 am to NYNolaguy1
Dorms usually cost more than off campus housing as least the avg off campus college type of place. So paying below market won't be a big deal in that aspect.
As said, I would simply set up an LLC to pay. Worst case scenario you hire a property manager for the time your kid lives in the house to make it more of an arms length transaction.
OP if you are going to do this, your best bet is to have them get roomates. If you buy a 3 bedroom house and your kid has 2 roomates you can often times almost break even right there with a mortgage payment.
As said, I would simply set up an LLC to pay. Worst case scenario you hire a property manager for the time your kid lives in the house to make it more of an arms length transaction.
OP if you are going to do this, your best bet is to have them get roomates. If you buy a 3 bedroom house and your kid has 2 roomates you can often times almost break even right there with a mortgage payment.
Posted on 8/10/16 at 9:44 am to NYNolaguy1
Sounds like you would be better off just taking advantage of the home ownership benefits as compared to renting and use the 529 funds for education purposes only. I'm sure there is a vehicle/method for recouping 529 funds that are not used by graduation.
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