FA questions on rental property and inheritance

Paying for College
1

<p>My oldest child is a high school junior and youngest is a high school sophomore. I am on an information gathering mission regarding funding college. Both kids would be competitive for schools that meet full need. They are not sure if they want to aim for them but if they do gain admission to such a school, we'd like to make sure we make good financial choices now. Our current EFC is around 30K/year if we had one child in college. They will overlap for at least 3 years and perhaps the EFC would go down, but even this seems unclear.</p>

<p>We own a rental property. A few years ago we had to relocate due to jobs and we decided to rent out our house as the market was quite depressed at that time. We hoped to hold eventually sell the house for college costs. </p>

<p>If we sell the house in 2014, I expect the profits (around 80K) would increase our EFC substantially. A big jump in income one year seems to hit the EFC harder than holding onto the asset. Any info on how selling a rental property affect EFC appreciated. </p>

<p>We are in the middle of settling an inheritance as well. I read the previous post about a family that cashed in annuities and had FA headaches. I would appreciate any info on the best way to go about dealing with an inheritance. It is a mix of properties, cash, annuities all tied up in a family trust. Several family members are involved and we expect this will not be resolved until 2015 at the earliest. </p>

<p>A lawyer suggested we keep the assets in the trust to reduce the impact on college FA. I was under the impression that inheritances become assets and are not taxed as income. Are they considered income for FA consideration?</p>

<p>Any thoughts, past experiences on these matters would be greatly appreciated. </p>

2

<p>

</p>

<p>I am not qualified to answer all of your questions. However, as a trusts and estates lawyer, I wanted to comment on the above statement, which surprises me somewhat. If your inheritance is vested and it is simply a matter of timing as to when the trustee will distribute the assets to you, it seems to me that it would be disingenuous at best and fraudulent at worst not to report the inherited assets for FA purposes.</p>

3

<p>I don’t think the EFC would be too much affected when you have 1 or 2 kids in college. When both kids are at college, the EFC would be split between them.
As for your non-primary home property, it would be considered as your asset before or after you sold it. So that may have little impact on your EFC. Remember, you will also have less income (rent) after selling it.</p>

4

<p>“I am not qualified to answer all of your questions. However, as a trusts and estates lawyer, I wanted to comment on the above statement, which surprises me somewhat. If your inheritance is vested and it is simply a matter of timing as to when the trustee will distribute the assets to you, it seems to me that it would be disingenuous at best and fraudulent at worst not to report the inherited assets for FA purposes.”</p>

<p>Is it reported (for FA purposes) only as an asset while still in the trust but then as income once distributed? Or once distributed does it remain asset only? By the way, with the updated CC, I am surprised a quote feature was not added!</p>

<p>Our rental pretty much breaks even unless we have repairs. If we sell it this year, our income goes up (I believe) for 2014 and would probably result in zero need based aid for son’s first year in college. If we hold onto, the asset amount still would result in need based aid (at the appropriate schools only, I realize this).</p>

<p>I do appreciate the thoughts. :)</p>

5

<p>If you or your kids are beneficiaries to a trust, you must report YOUR share of the value of that trust as an asset on the FAFSA and Profile forms. </p>

<p>I thought an inheritance did NOT count as income (at least a cash one) but any amount you have in the bank will be an asset…just like if it’s in a trust.</p>

<p>As noted, for FAFSA purposes, the rental property value is likely a wash. But as long as you are renting it, the rental income is also considered income, I believe.</p>

6

<p>Assets affect your EFC much less than income, so if there is anything you can rollover you should do this instead of cashing out. I suspect with at least two of the annuities I inherited they could have been rolled over like I did with my inherited IRA. It would have been more cost effective to borrow the money and then cash them out and pay off the debt during the last year of college. We are planning to do this if necessary with the IRA for our younger son.</p>

<p>I printed out the FAFSA pdf and worked through the entire thing on paper. It definitely takes the mystery out of the process. I did email my son’s FA office and they told me exactly what to send in so that they could consider ithe one time bump in income while preparing his aid package for next year. Your situation sounds much more complicated though.</p>

7

<p>RunWScissors, In your thread, I wasn’t sure on what options you had other than cashing out the annuity as I did not realize they could be rolled over. Thank you so much for mentioning this.</p>

<p>Also, I wanted to mention, I believe the lawyer was suggesting keeping the funds in the trust as assets instead of converting them to income. I did not mean to imply they were suggesting we “hide” the money, but that we deal with it in a way so that it is less likely to negatively impact FA. </p>

8

<p>Whether an inheritance should count as income has been widely debated here before. If you search you can probably find some of the past discussions.</p>

<p>My own opinion is that since the IRS does not count it as income, I wouldn’t count it as income either. It will be treated as an asset. And until the estate is settled and the proceeds distributed, you don’t have to count it as an asset. So it may benefit you to have it stay in the estate for as long as possible. Again IMO.</p>

<p>As for the rental, if you sell it any profit will be counted as income, so you will take a one-time hit. You will get to deduct the taxes you pay on the profits, and FAFSA will chew up about half of what is left. Keep in mind you have to recapture depreciation, and this will increase your profit on paper, raising the taxes you pay and raising the impact to your EFC. Any money left in the bank at the end of the year will get double-counted as an asset as well.</p>

<p>If you choose to keep the rental, the net value will count as an asset. </p>

<p>Also - schools that meet full need do not use FAFSA, they use the CSS Profile. This is a whole different set of rules, and each school can have their own variations. For example - you state that the rental breaks even. Is this after depreciation? Many schools will add the depreciation back in to your income because it is a phantom expense - you are not actually writing a check to pay depreciation every year. This can add thousands back on to your expected contribution. There may be other expenses that are limited or disallowed as well. Unfortunately, schools don’t publicize this info, so you can’t definitively know your expected contribution like you can with FAFSA.</p>

<p>For FAFSA, it just uses the numbers off your tax return, no adjustments are made.</p>

<p>Have you passed the two year window for selling your primary residence and not having to pay taxes on the gain?</p>

9

<p>Yes, when initially searching for info on this topic, I cam across a few CC topics already. Some were still pretty confusing though. </p>

<p>Hm, we have been considering selling the rental soon, mostly because it is an extra burden and we would like to lighten our stress load. Seems as though continuing to hold onto it for now is a better option though. </p>

<p>“Have you passed the two year window for selling your primary residence and not having to pay taxes on the gain?”</p>

<p>I am not sure what you mean by this. We purchased our current primary residence about 5 years ago and still live in it. We purchased our other home about 9 years ago and started renting when we moved (5years ago). We aren’t looking into selling our primary residence though. </p>

<p>I do appreciate the comments and info. This does help sort out some confusing ideas we have had.</p>

10

<p>I won’t speak for FA but as far as I know the IRS does not treat the inheritance as income. However, the income generated by the estate while it is being settled will be distributed to the heirs as income (could be both taxable or untaxable depending on the source) each year. You should receive a Schedule K-1 from the estate.</p>

<p>The executor of the estate should be able to tell you when the estate assets will be distributed and what income needs to be reported from the estate.</p>

11

<p>

When you sell your primary residence, you don’t pay capital gains tax on any profit for the first $500,000 (if married) if you meet some conditions. One of those is if you lived there within two years of selling. So had you sold the rental within two years of moving to your current house you could have avoided much of the tax on the gain. You are past that time though, so if you sell it now you will pay taxes on the profit.</p>

<p>You will also have to recapture the depreciation and pay taxes on that as well. I am not sure if the recaptured depreciation will show up as income on the FA forms… if it does you would be really punished for selling it now.</p>

<p>Does your estimate of $30K for your EFC include the value of the rental as an asset? I’ll assume that is just from income in the following…</p>

<p>Scenario 1:</p>

<p>Sell for an $80K profit, with $30K of recaptured depreciation. That’s about $20K in taxes, leaving $60K. This will add $31.6K to your EFC in year 1 ($28.2 K from the income, $3.4K from the what is left, which is now an asset), and $3.4K/year afterwards. You are full-pay for year one no matter where your kid goes.</p>

<p>Scenario 2: </p>

<p>Keep it. The $80K in equity will be treated as an asset, adding $4.5K to your EFC every year.</p>

<p>Seems like scenario 2 is better, especially if you are aggressive in coming up with a value.</p>

<p>Decisions like this are usually best driven by what is best for the entire family, not just from the college expense point of view. If the rental is a large family burden (I have rentals, I know what it can be like) the best thing may be to sell it, regardless of what happens to your EFC. Don’t let the tail wag the dog.</p>

<p>Finally: with an EFC of $30K on the FAFSA, you would be highly unlikely to get any need-based aid at any public school, even for out-of-state schools. And it would not surprising for a meets-full-need school to decide your contribution should be $40-$45K or even more. Many willt include Stafford loans as part of the package, and when you add a student contribution for summer jobs or savings, you may find these meet-full-need schools only give you $10K in real money, on down to nothing.</p>

<p>So in the end, all these machinations might all have been for nothing.</p>

<p>When you have 2 in school at once, then it might work out better. So many scenarios…</p>

<p>Hope this helps.</p>

12

<p>A few points:
My husband is the beneficiary, not our children. I know one of the FA forms specifically asks if the student is a beneficiary to any trusts. </p>

<p>My husband is one of the executors. At this point, there is much confusion over the value plus some family members are upset by the distribution specified in the will to the point of discussing contesting it.</p>

<p>noname: That is an interesting point on the income generated by the estate. I wonder if, likewise, expenses are deductible. Properties will need to be maintained until sold, etc. They will be hiring a lawyer and and accounting to sort through it all, so hopefully all these issues will be resolved.</p>

<p>Thanks notrichenough. That does help. Those are exactly the kinds of scenarios I have been mulling over and at first I was quite surprised by the disparity of selling vs. keeping. I am beginning to think we may end up holding onto this property until DH retires! It actually isn’t much work. I often forget about the house all together, but it is just one of those things hanging over us. As you can see, I am a “what if” kind of person and the house rental adds to the uncertainty. </p>

<p>Recently my older son mentioned wanting to go to school close to home…which really does not leave many need based options open to him. </p>

<p>“So in the end, all these machinations might all have been for nothing.” Yep.<br>
:)) :(( </p>

13

<p>One option not yet mentioned would be for your older son to plan now for a gap year. That would allow you to off-load the rental property, and not have the income from it affect the financial aid package for his first year of college.</p>