<p>I've read everything I can find about how real estate assets and rental income are treated on the FAFSA, but I'm still not sure I get it. (I also tried customer support for FAFSA.) Can anyone offer advice? </p>
<p>Here's the situation. A family owns two small businesses: Business A is the main business and the Business B owns the commercial buildings in which Business A operates. Business A pays rent to Business B; Business B makes mortgage payments on the commercial buildings, pays property taxes, etc. Business A has fewer than 100 employees. Business B is an LLC which is owned by the family members; as an LLC, it only has "members", not "employees".</p>
<p>My interpretation of the rules would be that neither business would have its value or assets reported on the FAFSA. The rental income of Business B also would not be reported. But the family members' salaries from Business A would be reported, and so would any end-of-year profit distributions for Business B if it made any profit.</p>
<p>I think that FAFSA will not allow you to count real estate as a business. I think they will consider the building an asset whether you own it though an LLC or not. So the value minus the mortgage is an asset.</p>
<p>And Profile schools will have a field day unwinding both…</p>
<p>My situation is similar to the OP and I thought it worked the way she has it noted.
The assets of neither business would be reported. Only salaries and any shareholder’s distriubtions would be reported as income. Note: if the distributions are the result of retained earnings they would not be reported as income on your taxes or on your FAFSA.
Of course, as hmmom has noted Profile schools are a whole different matter.
My advice is to try to stick to FAFSA only schools.</p>
<p>Thanks. I know that PROFILE will want everything, so that’s another whole thing. Though I was hoping that it would also be possible to point to the mortgage payments on the commercial property as well; it’s not all income, there’s outgo too.</p>
<p>From my reading, the FAFSA is very cautious about rental income being part of a business, because people try to claim that their second homes are actually businesses so they can exclude them. So you have to show that there really is a business there.</p>
<p>Ebeeeee (did I spell that right?) - can I ask another question? Where does the LLC’s rental income show up on your tax return? I’m not sure the accountant has been doing this right. Thanks…</p>
<p>It shows up as rental income in it’s own income category. On the other company it shows up as a rental expense. Of course, the LLC has various write offs for the building for instance building repairs, maintenance, etc. and the mortgage payment itself shows up as an expense which helps offset the rental income for the LLC’s bottom line.
Hope that helps.
Still doesn’t confirm your questions about FA. There are a couple of FA officers who post here so hopefully one of them will post soon.</p>
<p>Yes probably correct re: rental income and not being a vacation or second home. In our case it is cut and dry as the building is definitely commercial.</p>
<p>In valuing property, whether residential or commercial, you should always use the Federal Housing Multiplier Index table, located @finaid.org under the calculators tab. To do anything less, especially in California, means you’re giving away more gift aid money in financial aid.</p>
<p>I look at the 1040. If there is income on Schedule E from rentals, I expect to see a corresponding asset value in the asset section. I will ask for documentation if the parents report no or low asset value - especially if I specifically ask for verification and they just put 0. </p>
<p>If everything falls under Schedule C and the business has fewer than 50 employees, the assets for that business would not be reported on the FAFSA.</p>
<p>If someone rented a building to their business, I would expect the value of the rental to be reported. Renting buildings is not a business unless the building provides full services (like a hotel).</p>
<p>Some schools may dig deeper than we do - we don’t get many folks with much in the way of assets, so we aren’t really picky - if all they are getting is an unsubsidized loan, it’s not worth hassling a family. I know that private schools in our area require documentation of assets that should be reported - they are trying to maximize institutional funds.</p>
<p>For the OP’s question: From what you posted, it looks like Business B’s assets should be reported. The rental income from Business B is part of the family’s taxes, so is included in the AGI (schedule E, I am assuming). The family’s salaries are income from work, and Business A’s profits are also considered income from work (Schedule C, I am assuming).</p>
<p>Thanks, kelsmom. I’m not actually sure if Business B’s rental income is on the family’s personal income taxes or not. I was reading an IRS publication about how LLC’s file tax returns, and it said that a multi-member LLC files taxes either as partnership or a corporation; apparently the partnership form is the default if you don’t choose. If the LLC files its own tax return, then it seems like the rental income would not be part of the family’s taxes. But I don’t know.</p>
<p>Anyway, thanks again. This is all very useful info.</p>
<p>I’d take issue with reporting Business B as simply real estate rental income. You have one business organized into to two legal entities for tax purposes. From what you’ve described, the operations of the two are inseparable other than on a tax form.</p>
<p>I’d say list them both as businesses and if the school wants to take issue with it, make them take the initiative to prove otherwise.</p>
That’s exactly how it is. But the FAFSA language seems to be silent on this scenario. The hotel analogy makes sense for residential property that is used as a rental, but it doesn’t seem to quite fit commercial property. I also browsed around in the IFAP documents but didn’t find anything directly useful.</p>
<p>However, the school gets to make the call. I appreciate Kelsmom’s reply because it gives a window into how this scenario looks from the school side.</p>
<p>Except as Kelsmom said, she works at a school that sees few assets. More affluent schools that see a lot of assets parse the situation much more closely than Kelsmom’s school does.</p>
<p>Calreader, the LLC probably files a separate return as an LLC. Therefore the LLC bottom line-profit or loss-does flow through to the Schedule C on your personal return.
Scotta I am not suggesting that Business B is only reporting real estate rental income. Business B is a business and it actually is an entirely separate entity with a lot more than a tax form separating it from Business A. They actually do not get listed on the FAFSA as businesses. The income or loss from each business will show up on the individual tax return under a Schedule C.<br>
Schools which are FAFSA only will look at the Schedule C numbers which go to the AGI on the return.<br>
Profile schools will take into account the assets in the businesses.</p>
<p>Ebeeeee - in your experience, have you had tolerable results from any PROFILE schools at all? </p>
<p>Even though they analyze and use a lot more information, it doesn’t seem like a foregone conclusion that the results would be worse… but that’s my inner pollyanna talking.</p>
<p>Although the Profile will examine far more information, that does not mean automatically higher EFC’s. I’ve seen several instances where the Profile school comes out with lower out of pocket costs compared to FAFSA schools for the same students.</p>
<p>All you’re guaranteed is more headache out of the process.</p>
<p>Here we go again–scotaa, you’ve seen Profile schools come out with lower numbers for business owners with assets?</p>
<p>Calreader, my brother went through your situation last year. At the time I was taking a FA class and got help from the instructor, the Dir of FA at a Profile school. As she warned me, his EFC at Profile schools was multiples of his FAFSA EFC. When they deconstructed things they valued the business high, added back in business expenses making the AGI much higher and there was no protection for the real estate assets held as an LLC.</p>
<p>While their AGI looked like they would qualify for something, they get zero.</p>
<p>One of my children is at a Profile school. He gets nothing except his merit scholarship. Daughter is at a FAFSA only school. She gets small work study, small grant from school and good merit scholarship.
Scotta not sure where you get your information. My situation is at least somewhat similar to Calreader’s and I am trying to give her information based on my direct experience.
I have not heard of people getting a better read at a Profile only school. EVER</p>
<p>hmom - in your brother’s case, did they add back in the mortgage payments and property tax payments for the commercial property? I think those are probably the main things that balance against the business rental income - if they go, then it all looks like income, which would be a problem.</p>
<p>Edited after ebeeeee’s post - yikes, not a good result on your son’s school. Thanks for the info.</p>