Hi,
Parent of 3. First child is a HS senior and will be off to college next year.
In the process of completing the FAFSA form.
In 2016, we had an unexpected reported capital gain as my wife had to sell stock options to put a down payment on a condo so her elderly mother to could move close to us. Her mother is 87 and on a small fixed income. A large down payment was necessary to keep the mortgage payment(aka Mom’s rent payment back to us) affordable.
Due to this capital gain, our Adjusted Gross Income has been inflated by 44%. It is not an accurate indication of our annual income and the stock sale essentially depleted my wife’s securities/liquid assets. Next year, our 2017 tax return will be back to normal.
I assume there is no way to explain the one time event along with the FAFS submittal. Is this something worth explaining to the financial aid offices for all colleges my daughter will be applying to? If so, when should this be done? Let’s say we submit the FAFSA form this weekend, should we contact the financial aid offices as early as next week or wait for acceptances?
Thanks.
You can try to explain it to colleges after you file, as you outlined, as a ‘special circumstance’ and ask for professional judgment.
But, do you think it will matter? The stock would have been reported as an asset if she hadn’t sold it. The condo is now a second property. The rent is income. That will not be different on the 2017 taxes. Although your income was 44% higher, would you receive a lot of financial aid off the ‘old’ income? If the normal income is $100k and the 2016 income is now $144k, I’m not sure you’ll find a lot of aid coming off the FAFSA.
Next year your income won’t got back to normal- it will be the monthly rent times 12, in addition to your earned income.
Right?
So you’ve traded one asset for a house- which likely is paying MORE income than whatever dividend the stock yielded annually.
Not saying you can’t try to explain. But just model out what your tax return is going to look like this year and next year before you do so you fully understand what your income picture is going to look like.
And did your wife exercise options or sell stock which she owned in full?
Condo is not a true “rental income”. It is not being reported as an investment property(we already cleared this).
My wife owned the stock in full. It was common stock from former employer. Already exercised. So, yes her assets have been reduced, and, of course, would have been reported higher if they weren’t sold.
Not sure how they compare capital gains vs marketable securities or if it’s a wash.
Cleared this with who? I think only primary residence is not on fafsa. Any other property such as vacation home, needs to be declared as an asset. Especially since ‘rent’ is being paid back to you. If you go for special circumstances, they will investigate all this.
Any real property you or your wife own, other than your primary home, will have to be reported under investment assets under FAFSA. It is worth something. If you charge your MIL rent then that would be rental income.
Did you check your FAFSA EFC with just your wages?
Collegeboard website has an EFC calculator.
If it’s over $5,000 then you won’t qualify for a federal Pell grant (max $5,915 for $0 EFC).
When I say “cleared” I meant as far as reporting rental income on my tax return. Of course I will be including the condo as an asset with FAFSA(less mortgage).
Second home even if not income generating should be declared on fafsa.
Beyond, that it seems you are indirectly charging rent (by MIL paying mortgage), so that seemswrong not only to fafsa, but also to the IRS. Nobody can stop you from doing this, but you are running a risk.
While you are at it, might as well under-declare your investments… 
<<<< Condo is not a true “rental income”. It is not being reported as an investment property(we already cleared this).
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??? Who cleared this? This is not likely true at all. The fed gov’t and various colleges will consider that property as a second property/asset and will consider the payments towards the mortgage as income.
I own a few rental properties. There’s no way that FAFSA, CSS Profile, and colleges wouldn’t count for one of them just because I said that my mom was living there and contributing towards the mortgage.’
Colleges aren’t going to give you more money so that you can provide a parent a separate home . Colleges won’t give more money because they would then be effectively helping pay for that second home. Can you see how crazy that would be?
Very likely you wouldn’t qualify for much aid either way because it sounds like you may have two good incomes and some other assets.
What is your EFC and what kind of schools will your child be applying to??
You should probably require your child to apply to at least 2-3 financial safety schools…these are schools that will give huge merit regardless of need and based on your child’s stats.
It is not a rental property. 2nd home. We pay mortgage. My wife is co-owner on my MIL’s checking account. We use this checking account to make mortgage payment and out of our account we pay association fee. Together this is far less than monthly FMV.
Are you going to explain all this during special circumstances, or hide it?
Nevertheless 2nd home should be declared as asset.
Your wife might have to report in assets the co-owned checking account too.
Explained if necessary.
Fannie Mae occupancy type qualified as “principal residence”: borrower type–children wanting to provide housing for parents. If the parent is unable to work or does not have sufficient income to qualify for a mortgage on his or her own, the child is considered owner/occupant.
Believe me, I am not making this up. We qualified for a standard, low interest mortgage rate under this program.
Anyhow, I ran EFC (federal methodology) and came up with $40k based on my actual tax return.
If I removed capital gains and adjusted tax, it would have been about $20k. 2015 actual amount was about $18k.
"Your wife might have to report in assets the co-owned checking account too. "
Correct
You are way past Pell grant eligibility with that EFC, so unless the school offers institutional grants based just on FAFSA, like some LACs or catholic colleges do, it won’t matter.
I still have not seen you agree that 2nd home should be declared as an asset.
Maybe there is something to your argument of MIL contribution to mortgage not being income, I don’t know. I think the fanny mae quote is only related to what type of mortgage you can get. It does not imply that money is not taxable, nor reportable on fafsa.
Either way as a financial aid person at a university, if someone requests special circumstances, I would investigate why someone with a second home is trying to get financial aid.
@mommdc, many instate schools are fafsa only, and provide aid. Especially in expensive states like California for those types of EFC’s 18-20K.
“I still have not seen you agree that 2nd home should be declared as an asset.”
Response #7 page 1 "Of course I will be including the condo as an asset with FAFSA(less mortgage). "