A 529 plan is a tax-advantaged college savings plan authorized by a state. Most states offer at least one 529 plan. You contribute money throughout the years, which grows free of federal taxes and free of state taxes within the state that authorized the plan. Once your child is ready for college, you can pay his educational expenses with tax-free withdrawals from the 529 plan. If you're buying a house for your child to live in while he attends college, you might consider paying the mortgage with funds from the 529 plan, but the IRS may not view the mortgage as a qualifying expense.
How to Pay a Mortgage with a 529 Plan
A 529 college savings plan pays expenses incurred by your child while he attends school. If you purchase a house for your child during his college years, and you pay the mortgage on this property, your child doesn't incur this expense. In this case, using tax-free funds from the 529 plan to pay your mortgage can raise red flags and trigger problems with the IRS, but there are a few exceptions. You can purchase a house in your name and charge your child rent while he attends college. Rent is a qualifying tax-free expense under a 529 plan. Thus, you can take tax-free withdrawals from the plan and use these funds to pay your child's monthly housing expense. If you were to help your child purchase the house in his name, you could also use funds from the 529 plan to pay the mortgage.
Qualifying Room and Board Expense
If you're using tax-free funds from a 529 plan for your child's rent or mortgage, there are limits to how much you can withdraw for room and board each year. Each college and university decides a reasonable amount for room and board. For example, if your child's college or university decides that the qualifying expense for room and board is $10,000 per year, the amount you withdraw from your 529 plan for rent or mortgage cannot exceed this amount.
You cannot use a 529 plan to cover your child's rent or mortgage if he only takes one or two classes a semester. A 529 savings plan pays for a variety of educational expenses, such as tuition, books, fees and supplies. You can pay these expenses with money from the savings plan regardless of how many classes your the child takes per semester, but the rules regarding room and board differ. You can only use 529 withdrawals to pay for room and board if your child is working toward a degree and attending school at least half-time.
Tax Consequences and Benefits
If you decide to charge your child rent in order to pay his housing expense with funds from a 529 plan, you have to claim this rental income on your tax return. This can increase your taxable income, as well as your tax liability, but owning a rental property opens the door to additional tax deductions. These deductions help reduce how much you owe the IRS. Eligible tax deductions may include write-offs for mortgage interest, home repairs, condo fees and insurance.