@xaniamom
“Isn’t the equity (for FAFSA/CSS) defined as what you could net if you sold it today? In that case it would be $75K? (just going from her numbers)” I was not sure she was using the FAFSA definition of equity, perhaps she was listing her initial investment or how much of the mortgage was paid off.
For example, if she bought this 10 years ago for 100k and put nothing down and paid the mortgage so now there is 75k of equity, over the years she made 10k in improvements and when she sells the house is only sold for $110k because it is a depressed area, she will come out even but will take home a check for $75k tax free. This is a simple example which assumes she never depreciated the house (which is unlikely). However, in this case her equity might be 75k but her profit is 0 and so there would be no capital gains income. Again in real life you depreciate a rental which you have to recapture when you sell.
For the pure FAFSA definitiion of equity, yes you are correct except what she ends up getting may be more or less than that depending on the market, it is just a best guess until the property is sold. So I take it back it has importantance but may not determine her entire capital gain (taxable income on sale) since she may have expenses and capital expenditures on one side and depreciation recapture on the other. Bottom line the answer is complicated and she should sit down with her accountant to discuss her options.
Even if she nets 75k because she has paid down the mortgage, made a down payment when she bought or prices have risen substantially, her profit can be more or less than that and it will be considered income.