Rental property... assets or business???

[dietz199]

IF the rental properties are a family business and the primary job/income of the family then they are excluded from the FAFSA (yes, I know this for a fact as we were in that situation). It is an extension of the original exclusion of family farms from the asset calculation. The idea behind it being, if the family business is the main source of income then taking away the source of income by making a family sell or take loans against it is counter productive. In other words, if you own a dry cleaning business but are forced to mortgage against it to pay for college then your income would decrease (since you need to repay the loan), you might just lose that business and with the increased expenditures (due to loan repayment), the FAFSA calculation would change anyway.

'After this amendment is applied to section 480(f)(2) of the Higher Education Act of 1965, the legislative language becomes:

With respect to determinations of need under this title, other than for subpart 4 of part A, the term “assets” shall not include the net value of –
the family’s principal place of residence; or
a family farm on which the family resides.
a small business with not more than 100 full-time or full-time equivalent employees (or any part of such a small business) that is owned and controlled by the family.’

During the 1992 reauthorization of the Higher Education Act, the bill passed by the House of Representatives included a provision that exempted small business assets from need analysis formula. During the consideration of H.R. 609, Representative Marilyn Musgrave (R-CO) offered, and the Committee accepted, a similar amendment that exempted small business assets from the need analysis formula for families that own a business that employs less than 100 full-time equivalent employees. Under current law, farm equipment and other assets attributed to farms are excluded from the need analysis formula. The Committee believes this same protection should apply to small business owners, who should not be asked to borrow against their way of living to finance a child’s education and the modification is included in the Committee Print.

http://www.finaid.org/fafsa/smallbusiness.phtml

The rentals can’t just be a sideline, they have to be structured as a business entity and the family must actively be engaged in their management. Having one or two rental homes titled in the name of individuals (vs LLC, LLP S/C-corps) probably won’t fly - especially if your tax returns show other 1099 or W2 income as your primary source of family support.

Families with this type of business also income shift/balance. If possible you can carry forward losses in one year and take a higher income then apply the losses the following year to dramatically drop income. This way two years of a four year college would qualify for higher ‘need’. The family farm might be worth big bucks due to the land, but if the income sucks that family might even get Pell grants. Yes, I’ve seen it happen.

This only works for FAFSA schools. CSS-Profile schools on the other hand might want to know the number of gold fillings in a family since - technically - the gold could be pulled and sold. Yes, sarcasm, but the Profile will look at many more areas.

But, you would need to know the intimate details of your family’s financial structure and then get the appropriate advice.