529 money may buy college housing, but ...

Question

Dear Joe, If my son goes away for college in another town, can I use money in a 529 plan to buy a house where he can live while at college? Would this quality as a tax-free withdrawal for education expenses from a 529 plan? -- Sunil

Answer

Dear Sunil,

The answer depends on a number of conditions.

First, your son must be pursuing a degree on at least a half-time basis in order to count any room and board costs. The half-time attendance requirement does not apply to other categories of expenses that qualify for tax-free 529 treatment, such as tuition, fees, books, supplies and equipment.

Second, the expenses must be "incurred by" your son. If you were to purchase the home and pay all expenses associated with that home, the IRS could argue that no expenses were incurred by your son. The safer approach would be to have your son pay rent to you. However, you would have the tax issues associated with rental properties to deal with.

Finally, the law caps the amount of room and board that is considered a qualified expense for 529 purposes. The cap is directly tied to the room and board component of the school's "cost of attendance" or COA. The school must determine this figure for federal financial aid purposes, but for most schools the COA's room and board figure is below $10,000 per year. This rule will prevent you from pulling $200,000 tax-free from your 529 plan all at one time to buy a nice home for your son on the edge of campus.