You're talking about the unqualified but allowed expenses of "Room & Board" here, on a 529 distribution. Here's the scoop.
- For the "room" part of room and board, your mortgage payments on the property are flat out "NOT" deductible. It's not an education expense any way you look at it. It's an investment expense at best. You'll be reporting the rental income/expenses on SCH E anyway since you are "in fact" renting it out... even if only renting less than 100% of it out. (and that's true in your case.)
For the "board" part of room & board (which is basically food and utilities) since the college does offer a meal plan, what you claim for food can "NOT" exceed what a meal plan would cost for the semester. (So no steak & lobster for lunch/supper every day.) To that you can add whatever percentage of the utilities you pay with 529 funds on behalf of the student.
Next, be aware that what is paid for room and board must be "in direct support" of the education. So if the student does not enroll in classes for the summer semester, then you can not claim or deduct the cost of food and utilities for that semester since it would not be in direct support of the education.
The above takes care of the 529 and educational related stuff I think.
The rental income will be reported on SCH E of course, and I'm sure you're aware of that. Just understand that since your son lives in the same property and your son does not pay rent (I'll expand on the bold print later) that means the property is not 100% business use. It's important to note that in the program so that the program can make the correct splits on property taxes, and mortgage interest for you, automatically. But for the property insurance you'll have to "do the math" manually, yourself in order to get the correct amount to enter for the SCH E. Now about that bold print above.
If your student is the named benificiary on the 529 distributions *AND* you charge your son the same rent as you do everyone else, this helps all of you out tax-wise all the way around.
First, your son as the name beneficiary on the 529 will be the one whose SSN will be the "benificary recipient" box on the 1099-Q. That means your son will report that distribution on his tax return, and he will be the one to claim the expense as an "allowed" education expenses (even though it's unqualified, it's allowed per my statement above.) That will offset the taxability of that distribution to your son if he then uses that distribution to pay you rent.
That makes the property 100% business use and you'll find that even when you claim it as income on SCH E, more than likely the rental property will still show a passive loss "on paper" (meaning on your tax return) resulting in you as the landlord not having to pay taxes on it either.
Finally, just so you know - I've had a few rental properties for a few decades now, and put two kids through college. So if you need further help, just post back. I don't claim to know everything, but I've a fair bit of experience with what you're dealing with now. So if there's a question I can't answer, I'll tell you that up front and we'll find someone who can answer it.
