Mom22039

If the OP is going to move into the 2-family home, does he need to do so before January 1 of his student's junior year of high school? What should the timeline be?

thumper1

The house is an asset. The rents are income. Do you have other income? In addition as pointed out upstream, there are a couple of things to remember. First the huge vast majority of colleges do NOT meet the full need of all accepted students. Your parent contribution is highly likely to be higher than what your EFC or a calculator using the institutional methodology (Profile-ish) might indicate. Second, schools using the Profile EACH have their own formula for awarding their institutional money. You should be using the net price calculators for EACH college you might be considering as the money will most definitely vary from school to school. Even with that...your NPC numbers should be viewed as an estimate BECAUSE of your rental properties.

thumper1

Mom22. The move would need to take place BEFORE the FAFSA and Profile are completed. If the student is applying EA or ED and has an early Profile filing date...the move will have to take place before the Profile is file (could be as early as November 1).

So OP take that into consideration as well. If the college is fafsa only and you don't have an early Profile deadline, the rental/living arrangement will need to be reconciled probably BY January of your child's senior year in high school. You will not be able to wait until she graduated.

mom2collegekids

This will not be captured in the calculators, and can lead to an unpleasant surprise as it leads to large increases in income. And you won't know until your FA package comes.


Very true. People who have income that is not typical income from a job will likely have unpleasant surprises. Also, those who have "business deductions" often have these surprises.

Income that is not from a job is often calculated differently because that income doesn't have FICA and other earned income deductions. It is calculated more harshly.

However, even if all/most of your income was from a job, you still CANNOT think that NPC results are "close to final". NPC results often give "best case scenarios," which often do not happen because schools run out of certain aid early (SEOG grants, Perkins loans, etc).

Also, unlike much of high school aid, college aid usually includes LOANS and work study. So, while your child may get an FA package with $10k in aid, that aid may be nearly all loans and work-study....little or no free money.

Your FAFSA EFC may be somewhere in the $18-20k area (or more). So, that means that your EFC is way too high for any federal grants. (EFC must be about $5k or below for federal grants).

You may be misunderstanding FAFSA. Schools don't have to do ANYTHING with your EFC except see if you qualify for federal aid (which isn't much and you don't qualify for grants anyway).

That means that unless your child attends a school that has a lot of its OWN dollars to give away, you will likely be gapped big time.

If your child is a strong student and has high stats (high test scores and high GPA), then include a few schools that will give LARGE merit scholarship for stats.

sylvan8798

Well some of it does, but that's another matter.

notrichenough

What I meant was, it's not an expense that you write a check to pay for, like the insurance or a water bill.

sylvan8798

We are supposed to depreciate the appliances, carpet, capital improvements if they are not emergency repairs (like water coming in the roof), etc. If I have to buy a refrigerator and it isn't an "expense that I write a check to pay for" then what would you call it? Free?

ETA: If you know a place where we can get free appliances and capital repairs please PM me immediately.

notrichenough

You are not looking at this from the school's point of view.

You could reasonably view a refrigerator as an expense that is accounted for over multiple years by taking a depreciation deduction, but the Profile doesn't really care about about how you invest your assets, it cares mostly about this year's cash flow.

If I take $500 and buy a fridge (or a car or anything), my assets are reduced by $500, and this shows up on the Profile in the asset section. It doesn't affect your gross income in any way.

Why should the school give you an income deduction for your decision to invest in an asset?

You don't get a deduction from your income on the Profile if you buy a fridge for your own house, why should the they give you one if you buy a fridge for a rental?

You could say "well I have to spend that money in order to make money from the rental", that could apply to lots of things - you have to make car repairs to your car so you can get to work, but you don't get a deduction from your income on the Profile for that. You don't get to deduct mileage for driving to your job, either. So why should you get to deduct that on the Profile for your rental?

arabrab

How much is the duplex worth if you had to sell it? (Now, without doing anything to fix it up for sale?)
How much do you owe on the mortgage for the duplex?

If the duplex is worth $300,000, and your mortgage balance on the duplex is $100,000, then you've got a $200,000 asset in they eyes of financial aid. On the other hand, if you have a duplex worth $250,000, and a $220,000 mortgage, you only have a $30,000 asset to consider.

sylvan8798

Please explain how you define "cashflow".

If the refrigerator is an asset, how are your assets reduced by $500 when you have the refrigerator asset as opposed to the cash asset?
Why do we get to deduct them on our income taxes? How is that any different? We can't deduct the maintenance on our own home either, but we can deduct the maintenance costs for rentals.

notrichenough

Personal property isn't counted as assets IIRC.

You only get to deduct them because that's the tax law that Congress voted in, not because there is some inherent "correctness" about the deduction.

A private school is under no obligation to follow the tax code as to the definition of income and what deductions you can take against income.

Look at it this way:

You take a second job that pays you $2000/month in wages. You have to buy $500 worth of suits because the job requires it, and you drive 5,000 miles a year to get to this job.

or

You buy a rental property that pays you $2000/month in rent. You have to buy a $500 refrigerator to rent it, and you drive 5,000 miles per year to manage the property.

Both give you $24K/per year in income. You don't get to deduct your clothes or your mileage from your income for a job. But you do get to deduct the fridge and the mileage for the rental.

That is because the tax code treats these situations differently. Why should the school? As far as they are concerned you have an extra $24K in income. Your expenses are not their problem.

sylvan8798

So do they do that for other businesses as well? For example suppose you own a restaurant. Your gross sales are $2000/month. You have to spend $500 on food, and $100 to pay the dishwasher and the cook. As far as the school is concerned you have an extra $24K in income. Your expenses are not their problem.
Do you feel that we should be taxed on the gross rents then? And is that how you define "cashflow"? Irregardless of the expenses? At what rate would you tax them?

notrichenough

I'm sure they do, it's been reported on CC many times that the self-employed and small-business owners get penalized in the FA process over this very issue. Unfortunately, the schools don't publicize exactly how they adjust expenses, and I'm sure it varies from school to school. And I'm not saying they add back in every expense.
I'm not advocating for any particular taxing system, just trying to explain that the schools are not bound by the tax code when they calculate your income for the purpose of giving away their own money.

As far as my definition of cashflow - I put capital investment (which is anything depreciable) in a separate category. Cashflow to me is net income before taxes + noncash charges such as depreciation. Investments are made from the profit, which is cumulative cashflow. Not an accountant though, so I have no idea if these match the standard definitions or not.

sylvan8798

The problem comes in what is considered an investment and what is considered an expense. If a school uses the tax return values for expenses vs depreciation then they are, in effect, using the IRS's somewhat nebulous definitions of expense vs. capital investment.

Also, appliances being used as part of the rental operations are most definitely assets, and not "personal property". It would be difficult for property owners to separate the value of their property into "appliances", land/building, carpets, etc. Nowhere on any forms do they ask anyone to attempt this.

As it is, it appears that Profile double-counts rental income/assets in some way or other. Not saying they can't do what ever they want, but rental property owners should be aware that their situation is likely to work against them.

notrichenough

This is called "segmented depreciation" or "cost segregation". The IRS doesn't ask you to do this because they would much rather you depreciate everything over 27.5 years instead of accelerating the depreciation of assets with shorter life spans. But it is a perfectly legitimate thing to do.

I only did it for one building I have because in most buildings I have acquired everything was old (it's not worth it to separate out a 15 year old fridge worth $50), and it does cause extra paperwork. There are web sites that can help with this.