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Using 529 money for a real estate investment

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  • Using 529 money for a real estate investment

    If I purchase a condo for my kids to use in college can I devote a portion of the mortgage to their housing costs for the purpose of 529? In other words can you use the 529 in this instance to partially fund a real estate investment.

    Also can you subtract the child’s portion of the rental
    income so that it is not included in the income of the property for tax purposes?

    Thank you and I apologize if this has been addressed before.

  • #2
    A mortgage payment is not a qualified housing expense for 529s. You would have to charge rent, which would go to the rental. AFAIK housing is still capped by the school's on campus room and board prices. Student also needs to be half time.

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    • #3
      Small correction, this would be considered off-campus housing and capped by the schools off-campus room & board COA. Which may be more or less than the on-campus room & board actual costs.

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      • #4
        Thank you for your reply. So if I charged my full time student “rent” I could then consider this off campus housing charged to the 529. I would just have to consider the rental income for my taxes.

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        • #5
          Originally posted by MK$ View Post
          Thank you for your reply. So if I charged my full time student “rent” I could then consider this off campus housing charged to the 529. I would just have to consider the rental income for my taxes.
          I believe the rules of attribution and/or step transaction doctrine (assuming you have to gift your child the $$ to pay the rent) may come into play, but will defer to spiritrider.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            I'm using 529 money to pay housing costs for my child who is a fulltime student. Would this really be classified as a "gift?" Thank you.

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            • #7
              I like this idea. If you can use 529 money to legally pay a landlord, I don't see why it matters who that landlord is.

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              • #8
                529 can be used for on-campus, off campus or live at home with parents housing costs (rent or dorm fees, or at home expenses). Each school puts on their website the maximum cost of attendance for these expenses (even the live at home with parents expenses) or you can ask for this amount from the school financial aid office. You cannot pull out more out of the 529 than this number or it incurs the 10% penalty plus gains. the amount you pull out needs to be equal to the actual expense. Yes, the landlord can be parents. I would keep good records.

                i don't think you can subtract the income for tax purposes. income is income no matter who it is coming from. A renter is a renter.

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                • #9
                  Originally posted by bean1970 View Post
                  A renter is a renter.
                  When they are actually a renter.

                  In the OP's scenario, the student would be a renter in a landlord/tenant relationship. The OP would be landlord with taxable net rental income and any qualified 529 distributions would be subject to the school's off-campus housing COA limit. The family relationship between the landlord and tenant is irrelevant to landlord/tenant status. However, because of the family relationship FMV rules apply*.

                  On the other hand, students in the same family household are not renters. There is no landlord/tenant relationship or rental income. They do not pay rent to their parents, but might contribute a share household expenses. This is why it is considered living at home and any qualified 529 distributions for a share of the expenses would be subject to the school's much lower living at home COA limit.

                  *If the OP doesn't charge their child a fair market value FMV rent. They are significantly limited in the rental income deductions they can take.

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