Paying for Off-Campus Housing with a 529 Plan
Your student's room and board could be covered tax-free for an entire 12-month lease, even if he or she only takes classes for nine months of the year.
My son will be a sophomore in college in the fall and is living off-campus. He has a 12-month lease, but he doesn’t attend classes in the summer. Can I use his 529 money tax-free for the full year’s rent, or do I need to prorate the withdrawal based on the number of months he’s in school?
That’s a good question. You are correct that he doesn’t have to live on-campus to withdraw money tax-free from the 529 for rent. As long as he’s a student at least half-time, you can withdraw the cost of rent for the off-campus apartment up to the room-and-board allowance that the college included in the cost of attendance for federal financial aid purposes. (The figure is usually listed on the college’s website, or you can ask the financial aid office.) However, the tax law does not specify whether you can withdraw the money for the full year’s rent if he only attends classes nine months out of the year.
“The most conservative interpretation is that, even though the lease on the apartment might be for a full year, only the housing expenses incurred while the student is enrolled would definitely be considered qualified,” says Brian Boswell, of Savingforcollege.com. But, Boswell says, there is no specific guidance from the IRS on full-year off-campus housing payments.
“The more aggressive approach is if the student incurred a full year of rent, it could be considered qualified as long as he was enrolled at least half-time and expenses were at or below the room allowance as determined by the institution at the time,” Boswell says. But be careful, he says, because there’s no guarantee that the rent for the months he doesn’t take classes would be considered qualified when scrutinized by the IRS. “If the price of off-campus housing for the full 12 months is less than the estimated amount provided by the school for a school year, it’s unlikely the IRS would have any issue with it being considered a qualified expense,” says Boswell. If he does register for summer classes, however, the ambiguity is removed and the full year’s expenses will definitely count, up to the college’s allowance for room and board. Either way, keep canceled checks or other records of the rent paid in your tax files.
For more information, see IRS Publication 970, Tax Benefits for Education.