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I dont see this situation here. I have a niece I set up a 529 plan for. She is currently a freshman in college. Next year in fall she wants to rent an apartment off campus with two friends. As I understand distributions for rent from my 529 plan are qualified expenses up to the college cost of attendance for room and board. I emailed the school and its a little over $16K. The rent per month would be $719 (or $6471 for the 9 month academic year) which is well within the cost of attendance (including meal plan for the academic year). So for the academic year I seem to be OK. The problem is the 3 month summer break from late May to late August.  Because of my tax situation (qualifying for state health insurance) I dont want any earnings from nonqualified distributions to go on my tax return. I understand that when I student is not enrolled (ie. summer months) then rent for those months is a nonqualified expense. I dont expect her to take summer classes and stay in school.  There is also the issue of the ten percent penalty. I was thinking of doing the following.   1. For the summer rental, do a direct transfer from the 529 plan to my niece for the total rent amount that would be nonqualified.  Its my understanding she would receive a 1099Q for that amount and have to declare the earnings from that distribution on her tax return.  She is listed as a dependent on her Mom's tax return but the earnings would probably be around $1500 so as a dependent she should owe little to no taxes with the dependent standard deduction (2025 $1350). I dont expect her to have any earned income.  2. What about the ten percent penalty on nonqualified education expenses? She has a non taxable scholarship in the amount of $10K plus a pell grant. It is my understanding that withdrawls from 529 plans up to nontaxable scholarships avoid the ten percent penalty (but earnings are still taxable). When she files her tax return would the ten percent penalty on the rental distribution be avoided as long at the distribution is below her scholarship and pell grant? Thats my question.  Thank you in advance for any advice.