How a Rental Property is assessed

[Mwfan1921]

But if one wants to delve further into “how it works”, it seems we could have sold the rental house, and used the proceeds to a) increase our equity in our primary home or b) invest it into a retirement fund. Either way, that equity or that retirement investment would not have been, as I understand it, considered an asset…?

A)Home equity is not reported on FAFSA, but it is on CSS Profile. Profile schools vary as to how much home equity they include in their proprietary calculations to determine need.

B)Retirement assets aren’t included in either FAFSA or Profile, but your annual contributions are added back to your income for both.

There are people who shield rental property income by classifying it as a business…see details at the link, toward the bottom. Rules are governed by multiple IRS publications (527 and 334). https://www.finaid.org/fafsa/smallbusiness.phtml

If you pursue the LLC strategy, I would get buy-in from your accountant and attorney.