<p>My husband and his brother own rental properties jointly. Our share gives us a rather significant asset, but in order to borrow against it for college, my brother in law would have to be one of the borrowers. He has some issues with this, since it is basically their retirement plan. I am wondering whether anyone else has had issues like this, and if colleges really expect you to borrow against things you only half own.</p>
<p>Sorry if this has been addressed before. New here.</p>
<p>Yes, unfortunately even assets that can’t be sold/borrowed against will affect your EFC. But, for FAFSA, there is an asset protection allowance built into the formula which is based on the age of the older parent. Above that, parental assets (other than retirement plans and the primary home) are only assessed a small percentage each year. (Profile schools vary in the way/amount they consider asset contributions.) In any case, it’s probably not necessary to borrow against the property as Parent Plus loans are readily available if needed.</p>
<p>As noted, the property you own with your brother will be tapped as an asset…but I believe you will indicate your portion…1/2, not the whole thing. Someone else can verify this.</p>
<p>In any event it WILL raise your expected contribution to colleges in two ways…the rent from these rental properties is considered income and the equity is considered an asset.</p>
<p>I will say…consider yourself fortunate to have this type of investment property that hopefully WILL provide you with income when you retire.</p>
<p>In the meantime, you should run your numbers through one of the online calcultors…and then look for colleges that will be affordable to your family.</p>
<p>Good points, and just wanted to add that your half of the asset value should be reported as if you had to sell the property immediately…deducting any selling costs, repairs/maintenance that would be required, and pricing it accordingly.</p>
<p>We are new to this whole process. What is the point of counting something against you that you can’t sell or borrow against? Is the expectation that if you really, really want your kid to go there, you will find some way to use that asset to get the money?</p>
<p>
</p>
<p>It’s the rule. The reality is that you and your brother “could” decide collectively to sell this property. It IS an asset and an income producer. That you two aren’t going to sell it really does not get considered in the financial aid equation. It’s property you COULD sell.</p>
<p>The same is true for a beneficiaries share of a trust (those often can’t be liquidated either). </p>
<p>These are financial aid rules…it’s the way it is. You are fortunate to have an asset in this property. While I understand that this is earmarked for retirement purposes, the reality is that it is something that COULD be sold sooner. It is not a protected retirement.</p>
<p>^</p>
<p>Right… and technically, you could sell your half to your brother in law. That may not be desirable, but that’s how it’s looked at by FAFSA.</p>
<p>There are two major sources of funds that are used in FA. One is from the Federal Government in the form of Pell grants, Stafford loans etc. These are paid for by taxpayers. There has to be some sort of limitation on who can get these funds, as the objective is not to subsidize those who can afford it themselves. If the formulas excluded all assets that were difficult to sell in the short term, then you could see people who owned a multi-million dollar office building or business claiming that it needed to be excluded as they could not sell it easily for whatever reason. There has to be some limitations, else very wealthy people with smart tax lawyers could conceivably obtain Pell grants for their children. </p>
<p>The other major source is the college themselves. The give financial aid from their own resources and obviously they want to use their budget effectively. They would rather give money to someone who has low income and no assets rather than someone who has some income and some assets.</p>
<p>In other words, there are so many applicants for aid, and there are limited resources, hence all assets have to be considered to get a true picture of an applicant’s financial needs. You also have to remember only a portion of the assets are counted, not a 100%</p>
<p>What is the point of counting something against you that you can’t sell or borrow against?</p>
<p>Everyone could “give” someone else a small % of an asset and then claim that they can’t borrow against it because the other person won’t agree. The fact is that you have an asset that is worth money. </p>
<p>BTW…I don’t know what kinds of schools your child will be applying to, but all of this worrying may be for naught. Most schools don’t give much aid anyway. Since you’re likely past the EFC for Pell and such - even without that asset - you may not have gotten anything anyway.</p>
<p>Our EFC is very high because of rental property. But, even without it, our EFC would be too high to get one thin dime from my kids’ school for financial aid (except for an unsub loan which you don’t have to qualify for.)</p>
<p>What would your EFC be without that asset? What schools would you child be applying to?</p>
<p>And, you don’t need to borrow against that asset. You can always get a Plus Loan. However, I advise against parents or students borrowing much for college anyway. You probably have some affordable alternatives that won’t require borrowing much.</p>
<p>You say that this property is “basically” your brother’s retirement plan. It’s not possible to roll previously-owned property into an IRA, but any future properties (if any) that they plan to buy can be purchased within their IRAs. They’d need to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account, then buy the property with pre-tax funds. </p>
<p>IRAs are not reportable assets for FAFSA.</p>
<p>As the other posters have noted, half of the property value will be reported as an asset on FAFSA. Be sure to report only the net value (total value minus mortgages minus any reasonable selling expenses such as fix-up costs and commissions), not the total value.</p>
<p>In terms of counting the rents as income, do they use the amount from the 1040 Schedule E, or some other computation?</p>
<p>
</p>
<p>Well, not really, since he couldn’t afford to purchase our share unless he sold HIS share, lol.</p>
<p>I’m not a tax expert…but wherever you report your rental income on your taxes…is where the info comes from for the FAFSA/Profile. I believe rental income is INCLUDED in your adjusted gross income which is the income line used on these financial aid forms.</p>
<p>*Well, not really, since he couldn’t afford to purchase our share unless he sold HIS share, lol. *</p>
<p>That’s not the point. FAFSA doesn’t care whether a partner can or cannot buy you out. You would also have the option of selling your half to someone else…another relative or whomever. It doesn’t matter whether such a person exists or not. </p>
<p>But, again, this may all be for naught if your child applies to schools that don’t give much aid anyway to those who don’t qualify for fed aid. What is your EFC without the value of the asset? Where will he/she be applying?</p>
<p>sylvan, your adjusted gross income is one of the main driving forces in determining family contributions for college. For FAFSA purposes, your rental properties equity will be counted but only YOUR share…I believe the %age that you have been using on your taxes. The rent you get from these properties will also be used…again…your portion.</p>
<p>I don’t want to pry into your finances, but you should look at your income anyway as noted. You may find that your income puts you in a position where your eligibility for need based aid isn’t high anyway. Like I suggested earlier…run your numbers through one of the online financial aid calculators…and this will give you an estimate of what your family contribution might be. Do it WITH and WITHOUT the rental properties.</p>
<p>As I said earlier…you should consider yourself fortunate to have those rental properties in your financial portfolio. The reality is they DO have value for you and your family. This is what the financial aid calculations consider.</p>
<p>
Schedule E profit or loss (generally a loss on paper, unless you’ve owned it for so long that the depreciation is depleted or you got it for a very cheap price relative to the rents, or have no mortgage) falls through to the modified AGI line (line 37 on the 1040).</p>
<p>However, you are also separately asked for parent’s income that doesn’t include rental income or loss (and can’t include business loss either). I don’t remember what effect it has when they don’t add up.</p>
<p>Note that CSS Profile schools are free to disregard any of the expense items on Schedule E (like depreciation, which some schools consider a “phantom” expense), which can really up your number.</p>
<p>When you value the assets, be aggressive - don’t use Zillow, look up the Federal multiplier, factor in the costs mentioned by sk8rmom, and if it is titled so that you each own 50% (tenants in common, rather than jointly owning 100%), I would discount the price further because buying half a property will have much less appeal than buying the entire property, and thus require a lower price.</p>
<p>You mentioned “properties”, like there is more than one. You might be able to get creative and swap some ownership so that each person owns 100% of a building, at which point you can possibly tap the equity.</p>
<p>
</p>
<p>I attempted to compute the EFC with no contribution from the rentals (rents or asset value) and got approximately $21K. Including the rents and equity it is more like $62K. I don’t really understand the logic of saying we could/should sell the rentals, since they provide part of our income stream. It’s like, if someone has a snowplow they use to make some of their money during the winter (as a business enterprise). The snowplow is an asset, so they should sell it and use the money for college. Then they have no plow and no business.</p>
<p>Most of the schools our son is looking at are private.</p>
<p>
That’s a pretty big jump.</p>
<p>Are you using line 26 or line 41 off of schedule E? Or are you just counting the rents?</p>
<p>Likewise, are you using the net asset value (market value - debt)?</p>
<p>Some solid numbers would help here, if you don’t think it is violating your privacy too much.</p>
<p>
</p>
<p>Line 26 (we don’t have any of that stuff on the back). Last year it was $44K. The net asset value is my husband’s latest estimate of our half of the equity, about $500K. We have 2 kids. Our son is a Junior, and our daughter is a Freshman, so we expect that they will overlap in college for a couple of years. I only work a little part time, and my husband has a full time job in addition to the rentals. We don’t have much in savings otherwise.</p>
<p>$500K in assets, with no other savings, would result in an increased EFC of around $25K (you have an asset protection allowance that is subtracted first, and the remainder is multiplied by 5.6%).</p>
<p>So the asset accounts for $25K of the $62K EFC that you say you calculated; the rest (approx $17K) must be from rental income. Income is factored into the FAFSA formula at a much higher rate than assets.</p>
<p>Given that you’re unlikely to qualify for need-based aid with an EFC of $62K, now is the time to plan for what you can afford. Talk to your children and set their expectations. You’re in a better position now with a junior in high school than those parents who don’t realize how the EFC formulas work, and have to deal with the shock after kids have been accepted into expensive colleges that are essentially unaffordable.</p>