Using a 529 Plan for real estate investment

[Outby7]

Hi all,

I have never seen this topic addressed in this or any other forum so here is the scenario: I buy a house in a college town where my kids will be attending school. I then use the proceeds from the 529 plan to pay the monthly rents. Essentially, I am paying the mortgage through the plan. My thinking is why pay the school or some landlord the room and board cost when I can be paying myself. I sell the house (hoping for appreciation) years later. My situation is unique in that I will probably keep the house for a minimum of 7 years since I have several nieces and nephews who plan to attend the same college (they all have 529 plans as well). A reasonable plan?

 

[Martha]

Section 529 of the Internal Revenue Code allows you topay qualified higher education expenses, defined as:

3) Qualified higher education expenses

(A) In general
The term "qualified higher education expenses" means -

(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and
(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.

(B) Room and board included for students who are at least
half-time

(i) In general
In the case of an individual who is an eligible student (as defined in section 25A(b)(3)) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(6), a designated beneficiary shall be treated as meeting the requirements of this clause.
(ii) Limitation
The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed -

(I) the allowance (applicable to the student) for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect on the date of the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or
(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period.



Here is the publication that should cover what are proper educational expenses:
http://www.irs.gov/pub/irs-pdf/p970.pdf

 

[cute fuzzy bunny]

Good idea, but doesnt look good. Unless you somehow sub your house to the college who in turn rents to the students, although I think you'd have a good time doing this and having only the kids you want able to rent there. Plus i'm sure the college would want some sort of a cut.

 

[Martha]

One thing I didn't think about either was whether there might be limitations on self dealing that would prohibit you from paying money to yourself or to an entity you created. A good resource for your questions is: http://www.savingforcollege.com/

The use of the 529 money aside, a lot of homes in the neighborhood of our local university were in fact bought by parents. The parents let their kid live there with a bunch of other kids, who pay rent. They sell the house when their kid graduates. When housing prices were on the rise, this was working great.

 

[Nords]

The use of the 529 money aside, a lot of homes in the neighborhood of our local university were in fact bought by parents.  The parents let their kid live there with a bunch of other kids, who pay rent.  They sell the house when their kid graduates.  When housing prices were on the rise, this was working great. 

We've thought about doing this when our kid goes to college. Of course we probably wouldn't get the project moving until her sophomore year, but it'd sure teach her a lot about managing property, roomates, & friendships.

Anyone else tried it? Lessons learned?

 

[Outby7]

Martha,

Thanks for the responses. I will check out the website for additional info but so far it sounds like my idea should work. I asked an accountant about this as well and his immediate response was positive.