Snowbirds with College Student

[MySharonA]

Here is our plan.  Please weigh in with pros, cons, and potential pitfalls!  Thanks much....

My spouse and I live in Idaho and our child is a freshman at the local college.  We're retired and are purchasing a second home this fall in Arizona to escape the cold winters.  Our child lives on campus in the dorms now but will move in with us in May when school is out, then live in our Idaho home year-round.  The plan is to rent out two spare rooms to friends for the school year (Aug-May).  My spouse and I will move to Arizona, then come back to the Idaho house over the summer (May-Aug) when the roommates move out.  When school starts again the next fall, we'll return to Arizona, and so on until graduation. We'd like to use our child's 529 funds to pay their portion of the rent for the school year (essentially Room and Board, paying the same monthly rent as the roommates for those nine months).   What are the tax implications of this living arrangement?  Do we need to claim the rent as income?  Does anyone out there have the same situation?  What state should we consider as our domicile?  Our questions are endless!  Thanks for your input.  

[Rick19744]

"Our questions are endless".

This forum is not conducive to endless questions.

I recommend you sit down and have a one on one with a tax professional who understands multi-state tax; not all do, so make sure you ask this question.

Any upfront cost will save potential future problems, errors and tax penalties.  Don't be penny wise and pound foolish.  Not worth it.

[Carl]

Do we need to claim the rent as income?

Bottom line answer is Yes.So it will basically cancel out the tax break on that portion of the 529 distribution used for rent.

You also have to depreciate rental property while it's in service. Taking it in and out of service has it's issues too, as you'll be reducing the cost basis of the property every time you put it back in service, by the total amount of all depreciation already taken.

During the period of time the college student is living at home while not in college, means that nothing is deductible. While 529 funds can be used tax free for room & board, that room and board must be paid in direct support of the education. So if they're not enrolled as at least a half time student for the summer months and are paying rent, that rent for those months can't be used to offset the taxability of the 529 distribution for that amount.

This is just "a taste" of things you have to deal with on the tax front with this setup. I've barely scratched the surface. Seek the advice of a local tax pro familiar with multi-state taxes, as when states also tax personal income, that complicates things and increases your tax liability.

[TomD8]

If you use the second home in AZ only to "escape the winters", then Idaho remains your state of domicile, and ALL your income remains taxable by ID.

AZ does not regard you as a resident for tax purposes unless you spend more than 9 months of the tax year in AZ.

As a non-resident of AZ, you would only be subject to AZ income tax on "AZ-source" income, for example rental income from a property located in AZ.

[Hal_Al]

I think there are only three basic questions.

Q.  Do we need to claim the rent as income? 

A.  Simple answer: No.  It's just room mates sharing expenses.  For detailed discussion see: 

 https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/roommate-schedule-e/0...

Q. What state should we consider as our domicile?  

A. AZ . Your ID home will become a 2nd home (or possibly a rental unit).  You will have to file as part year residents of both ID & AZ for 2022. If you do report income from the "rental", you will have to file a nonresident ID return starting in 2023.  AZ will give you a credit, or partial credit, for any tax paid to ID.

Q. Can we use our child's 529 funds to pay their portion of the rent for the school year (essentially Room and Board?

A. For sure, you can use the 529 plan for board (food).  It's a little fuzzy whether  you can claim "room", since you own the property.  Since the home is being retained specifically for college living, I would claim it.  

 You may count your actual cost  (food, mortgage interest, utilities, property tax, maintenance) less what the roommates pay, or the school's aid allowance (typically what on campus students pay for R&B), which ever is less. 

[TomD8]

This Idaho website explains the concept of "domicile" and describes what's involved in a change of domicile:

https://tax.idaho.gov/i-2015.cfm#domicile

You would file two part-year resident state tax returns for the year in which your domicile changes to AZ.