Purchase of real estate

[maxman17]

As an investment advisor, I recently met with a client whose
cpa informed him that his 529 money could be used to purchase real estate in the childs college town and re-sell it after the college need was over. I can think of some strategies that might work here, but has anyone seen a good article or ruling on this?

[bwilk]

Be careful here. I think the amount that can be used is equal to the amount the school lists as off campus housing. I don't think the whole price of a condo is allowable, just the off campus allowance amount.

[maxman17]

I'm assuming though that if parent makes the down payment and arranges financing, the 529 money could be used for debt service as long as it did not excede the usual and customary off campus rental rates.

[junzhang]

Be careful, higher interest rate= lower real estate price. We are at the peak of real estate just like the the eve of 2000 stock crash. Equity (espically the black gold) looks attractive.

[user_2529]

I have been searching for more info on this topic as well. This was aportion of a class I have been teaching, but so far I'm limited to some anecdotal stories about what parents have done with real estate and college funding. I interpret the rules as stated above, the college's off-campus budget for housing is the limit that can be withdrawn from a 529 or a CESA to pay for mortgage, utilities, down payment, taxes or anything else associated with owning rather than renting.

[rsinj]

I agree with maxman. If this is the route they will go, parents should buy it and then write a rental agreement with the child and then have the child write monthly checks back to the parent. The amount of rent allowable to be qualified 529 withdrawals would be subject to a cap as bwilk indicates.

It could work out for the parents if real estate prices are reasonable near the college.

[sampat]

Would it not be better to own the real estate in Child's name as if there is any Cap. Gain, the child will not be liable for capital gain taxes as it would be treated as principal residence.

[junzhang]

Maybe you should consider buying real estate in the University town your kids wich to go to. The extra room can be rent out to generate some cash.

[rsinj]

SampatSaraf - if the child owns the real estate, you have a couple issues.

1. if the student owns the property, how are you going to take qualified withdrawals from the 529 to make mortgage payments on your own property - you can't.

2. if the student owns the property, who is going to take the mortgage interest and real estate tax deductions? surely not the student - do they have any income sufficient to use those deductions?

3. if the parents own it and rent it out to the child (and possibly others), the 529 funds could be used to pay rent (up to the cap we previously spoke of), the parents can deduct the mortgage interest, real estate taxes, take depreciation, and all expenses for maintenance using schedule D. the parents could probably even deduct reasonable travel costs to visit the property (child) periodically.

As far as capital gain upon sale (if there were a gain), that is an issue, however, there are probably some ways you can work around it. You'd probably need to work some spreadsheets of the cost/benefit scenarios that are applicable. Again - what is the goal - buying the residence for the ultimate capital gain? Or for housing and being able to utilize the untaxed funds from the 529 to help pay the mortgage?

[sampat]

rsinj-

Thanks for bringing up these issues. I had not thought deeply about these complications.

With regard to 1., Is mortgage payment up to the institutional limit not considered qualified withdrawls? What if an adult child is financially independent and wants to go to school from his own savings?

1. If Child has any incomes/summer jobs and rental income from renting part of the property to other students, he should be able to deduct expenses on his tax form. Granted at his income level, tax deduction may be not worth much.

2. As you suggest, analyzing with spreadsheet would be best to figure out which scenario is better. If price appreciation is like it has been in last 4 years, avoiding capital gains may be better than other tax considerations..

[pho408]

Can you use your 529 fund to purchase real estate, let it appreciate, then sell it later when you child is about to start college.

Thanks,
Phuong

[rsinj]

Can you use your 529 fund to purchase real estate, let it appreciate, then sell it later when you child is about to start college.

Look - you can use your 529 fund for anything in the world you like - you pay the taxes and 10% penalty and it's yours free and clear.

We were walking a thin line with the original post here, now you want to just take the money when the child is not even going to the school for some years?

So, let's see what you're contemplating here:

1. Contribute to the 529
2. Take state tax deduction on the contributions
3. Earnings grow tax free
4. In a few years, with the money that's built up, we'll just take some of the money and buy some real estate (without any taxes or penalties or interest on the amount taken)
5. Maybe use the money to buy a personal residence
6. In two years, once we qualify for the $250k/$500k exclusion on sale, we'll sell it.
7. Maybe we'll put the 529 money back after we sell the property.

Have I got all that right?

The simple answer to your question - NO.

Try Google: 529 qualified withdrawal

[russthomas]

If a student has equity in his personal residence it it an asset for financial aid purposes?

[user_2529]

Equity in the primary residence is not counted on the FAFSA. That's the Fed Methodology. As it has been pointed out in other posts some colleges, particularly privates, will also use the Profile form. This digs deeper into assets like cash value insurance and possibly home equity. I think there is a question about how much loose change you can find in your couch.

[triggerfish]

Hey junzhang,

Where is Yaguo?