My point was that for those students living off-campus, these expenses are discretionary in type and cost, which was a concern that you voiced regarding acquiring furniture. If discretionary expenses are subject to IRS challenge, then the same would apply to off-campus choices of housing and food, right?
No, I don't agree. While renting furniture might make better sense for a number of different reasons for a student living off-campus, as long as the expense is "reasonable" within the eyes of the IRS for room and board purposes, there is no prohibition in section 529 regarding the acquisition of furniture. A bare rented apartment with no furniture I think would be considered not ready to inhabit by most people.
If an apartment complex rents to students from a nearby college and offers similar apartment layouts in both furnished and unfurnished conditions with furnished apartments costing $200 per month more than the unfurnished apartments, does that $200 extra per month spent from a 529 count as a qualified expense? If the answer is yes, what if a student instead of spending the extra $2,400 a year for a furnished apartment spends that same money upfront to buy a bedframe, mattress, desk, table and two chairs, all using 529 funds? Is this now improper and the expense non-qualified?
No, it is not at all my argument that somewhere in the IRS regulations or rulings there is language that specifically approves as a qualified 529 expense the cost of acquiring furniture for an off-campus living arrangement. I am saying that, as far as I know, there is no guidance that prohibits the use of 529 qualified funds for such an expense. Absent any specific guidance from the IRS, all we have to go on is the test of reasonableness found in the statute. Therefore, the crux of my argument is this: it's a reasonable expectation that a student will need to spend money to acquire furniture for an off-campus place to live.
What specific regulations or guidance has the IRS provided regarding which off-campus housing expenses are 529 qualified and which are not? How often has the IRS investigated or audited a college student who lives off-campus and took distributions from a 529 that did not exceed the school's COA, based on a suspicion that some of that 529 money was not really used for a qualified expense?
Now, before you try to claim again that I am suggesting that a student should attempt to disguise any non-qualified expense as a housing expense to avoid paying tax on the earnings portion of a 529 distribution, I am saying no such thing. A student living off-campus who attends a school with a room and board COA of $10,000 for off-campus students and at the end of December finds that he has spent $9,900 that year for rent and food should not take a final $100 distribution from the 529, buy concert tickets for him and his girlfriend, and expect that the distribution will be treated as qualified and he will not be subject to tax and a 10% penalty on the earnings portion of that $100 distribution. On the other hand, if the desk chair in his off-campus apartment has broken and needs to be replaced, I would consider this to be a reasonable housing cost and therefore a $100 distribution from the 529 to cover this expense should be considered qualified.