Furniture qualified?

[Rethinker]

If a furnished off-campus apartment is considered a qualified expense for a 529 plan (up to the amount it would have cost to live in a dorm), is there any reason why expenses for basic furniture wouldn't also be qualified - particularly since the rent is lower for an unfurnished apartment?

[dcandmc]

If the student is living off-campus, just take as a 529 distribution the maximum room and board component of the Cost of Attendance for the student's living arrangement as published by the school. If after paying rent and buying food there are room and board dollars left over, I don't see any reason why those dollars can't be spent on additional housing expenses.

[Rethinker]

Thanks. Is that the general consensus?

[mfrank]

No, I would not agree that's the general consensus. Here's a thread which, though a few years old, takes the opposite view. So judge for yourself. https://www.nerdwallet.com/community/t/529-plan-expenses/19820 I too would struggle with the notion that acquiring furniture is a cost of attendance. I recently put two kids through college who lived off campus for their junior and senior years and would never have construed the furniture we purchased for them as being a qualified education expense.

[dcandmc]

I didn't specifically acknowledge that expenses for basic furniture in off-campus housing should be considered 529 qualified, because it's not clear that would be the case; I used the term "additional housing expenses." I thought about it this way: when you live in a college dorm and pay the school for the use of that space, the room portion of room and board expenses covers not only the right to occupy the space, it also pays for utilities (water, electricity, heat) and includes the use of basic furniture (a bed and mattress, desk and chair, probably a bureau). So if paying for a dorm room on campus that includes those other benefits is definitely a 529 qualified expense, why wouldn't the same standard apply to similar expenses involved in renting an off-campus apartment?

Edited to add: reiterating that the qualified expenses for off-campus housing should not exceed the school's COA for room and board based on the student's living arrangement.

[mfrank]

Dcandmc, you seem to be admitting that "it's not clear" off-campus furniture is 529 qualified but then go on to suggest that by disguising the furniture under the rubric of "additional housing expenses" it works. That alone wouldn't pass the smell test for me. In addition, there are lots of reasons the dorm analogy you apply isn't "the same standard" as renting an off-campus apartment. For dorms, the student is paying the qualified educational institution directly for furniture the institution owns and the use of which is a mandatory part of the housing expense. (Often some of the furniture is even built into the room and in any case the student does not have the liberty to remove the dorm furniture.) In off-campus housing, the furniture selected is a discretionary purchase and the student is in effect reimbursing her/himself because the furniture is an asset that the student then owns and which the student can then take anywhere else or even resell later. So from a tax policy perspective, it would open the door to receiving tax-favored distributions for education and then converting them back into cash after the fact without penalty. I don't have a dog in this fight but I am skeptical that IRS would allow that. Rethinker will decide which path to choose. Good luck with that! These are just my thoughts. Signing off.

[mark]

I think it is not that hard to hit the max COA for room and board. After rent and utilities, how hard is it to say the rest is for food? Everything they eat/drink could be considered food costs. For my kid, we easily hit the school's COA before needing to use it for something like furniture.

[dcandmc]

I'm not "admitting" anything -- I'm explaining.

I'm not suggesting that anything be disguised.

Rethinker doesn't specify what kind of expense for basic furniture is contemplated. If it's a purchase for ownership, I think that's a problem in the context of a 529 qualified expense. If it's a rental contract for the time that the apartment is being used in student status, that's a different issue and I think it is comparable to the dorm analogy.

If a full-time student is living off-campus and utilities aren't included in the monthly rent for the apartment, do you think that payment of necessary utilities (electricity, water, heat) is a 529 qualified expense, up to the college determined COA based on the student's living arrangement?

[mfrank]

Yes, I think utilities are a 529 qualified expense but this thread is about "furniture." Maybe furniture rental is a stronger analogy to the dorm but it's still to my mind discretionary and subject to challenge.

[dcandmc]

Yes, I think utilities are a 529 qualified expense but this thread is about "furniture." Maybe furniture rental is a stronger analogy to the dorm but it's still to my mind discretionary and subject to challenge.

In more general terms the thread is about housing associated costs that may or may not be 529 qualified expenses.

Having a bed to sleep on, a chair to sit on and a table to eat off of or study at are about as discretionary as having electric service.

[mfrank]

Oh, please, give me a break. So is a queen size bed comparable to a twin or bunk bed in a dorm? Is an office chair comparable to the desk chair in the dorm? Is a dining room table comparable to what exists in the dorm? The list goes on. If you want to open this can of worms, be my guest.

[dcandmc]

Oh, please, give me a break. So is a queen size bed comparable to a twin or bunk bed in a dorm? Is an office chair comparable to the desk chair in the dorm? Is a dining room table comparable to what exists in the dorm? The list goes on. If you want to open this can of worms, be my guest.

Dude, what are you talking about? Where have I mentioned at all what type of furniture might or might not be appropriate? What I am saying is that having functional furniture is a basic requirement to having a habitable living space. Functional furniture is part of the deal when a student pays for an on-campus dorm room, and even though use of furniture may not be broken out as a line item on the college bill, you can be sure it's an expense born by the college that is passed on to students who pay for room and board, which is a 529 qualified expense for students who are enrolled at least half-time.

As mark pointed out above, after an off-campus student pays the rent bill and buys food, there may not be any room left in the COA amount to pay for any other living expenses. But if there is any room left, I think that paying for basic utilities is a 529 qualified expense (something you agree with), and the same applies to basic furniture that is required to make the living space habitable. Sure, rent the furniture so that the use is comparable to living in a college-owned dorm where the school provides the furniture, and there is no issue regarding ownership and retained assets that the student can later benefit from.

[mfrank]

You say: "Where have I mentioned at all what type of furniture might or might not be appropriate?" That's my whole point! The type of furniture acquired is discretionary, and subject to challenge. Now you're saying "basic furniture" is okay but who determines what is "basic furniture"? I suppose the IRS would determine that upon audit, if they don't simply disallow the rental furniture at the outset.

[dcandmc]

You say: "Where have I mentioned at all what type of furniture might or might not be appropriate?" That's my whole point! The type of furniture acquired is discretionary, and subject to challenge.

The type (and cost) of an off-campus apartment acquired is also discretionary. The amount and type of food purchased is discretionary.

Now you're saying "basic furniture" is okay but who determines what is "basic furniture"? I suppose the IRS would determine that upon audit, if they don't simply disallow the rental furniture at the outset.

I think all that the IRS cares about is that distributions from the 529 don't exceed the college's COA based on the student's living arrangement. Section 529 of the Internal Revenue Code states that Qualified Higher Education Expenses shall include "reasonable costs" for room and board for students who are least half-time. Be my guest if you want to dig deeper into the weeds to see what (if anything) IRS regulations and rulings say on this subject that might be more detailed, but it would surprise me if (a) the IRS wanted to take a closer look at the expenses incurred by an off-campus student whose 529 distributions were within the school's COA, and (b) the IRS considers the expense of basic functional furniture to be an unreasonable room and board cost.

Don't get me wrong; I'm not suggesting (as you have accused me of doing) 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. When the only guidance the IRS provides is that housing expenses should be "reasonable," it's up to everyone to apply common sense and their own conscience to figure out what this means in their own particular situation.

[mfrank]

Sorry, but you're making this stuff up as you go along. There's no doubt that food is a qualified expense. There's no doubt that housing is a qualified expense. There is little doubt (even you seem to agree) that purchasing furniture is not a qualified expense. And there's no doubt that if one looked into the weeds, nowhere would one find guidance that renting furniture is a qualified expense. Yet you continue to make that argument. And then you cap it all off with the statement that "all that IRS cares about is that the distributions don't exceed the college's COA...' There is no doubt that IRS would disagree.

[dcandmc]

Sorry, but you're making this stuff up as you go along. There's no doubt that food is a qualified expense. There's no doubt that housing is a qualified expense.

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?

There is little doubt (even you seem to agree) that purchasing furniture is not a qualified expense.

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?

And there's no doubt that if one looked into the weeds, nowhere would one find guidance that renting furniture is a qualified expense. Yet you continue to make that argument.

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.

And then you cap it all off with the statement that "all that IRS cares about is that the distributions don't exceed the college's COA...' There is no doubt that IRS would disagree.

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.

[mfrank]

I'm not wasting any more time on this. Your argument is not even consistent from one minute to the next. Now you say there is no guidance that prohibits the purchase of furniture as a qualified expense. Earlier today you said: "If it's a purchase for ownership, I think that's a problem in the context of a 529 qualified expense." So make up your mind. I've said my piece. Bye, all.

[dcandmc]

I'm not wasting any more time on this. Your argument is not even consistent from one minute to the next.

Yup, I've thought about it a bit more, and I'm less sure that an outright purchase of furniture would in fact be an issue.

Now you say there is no guidance that prohibits the purchase of furniture as a qualified expense.

Not that I'm aware of, and I never said that there was such guidance. If you know of any such guidance from the IRS, please share it.

It seems like your position is as follows: if a student who is enrolled at least half-time is living off-campus and is using 529 money to pay extra to rent a furnished apartment, that extra expense is qualified.

If the same student is using 529 money to rent furniture for the off-campus housing, that may be a 529 qualified expense.

If the same student is using 529 money to buy furniture for the off-campus housing, that is not a 529 qualified expense.

Do I have that right? Why the distinction between renting a furnished (and therefore more expensive) place, renting furniture, and buying furniture?