So I’ve read a few threads on this site (from some years ago) that concern this topic generally. Of course, each situation is different so I’m going to broach this topic (again) in the hopes our particular situation might be better addressed by those of you in the know and with more current information.
We have 2 kids in high school. The first will be going to college in the Fall of 2021.
Our biggest concern at this point relates to our assets. And, as the thread states, we have one rental property we own. It was previously our original home that we were able to keep and rent out when we bought our current home about 3 years ago.
On our taxes, it isn’t generating much income (with mortgage, insurance, depreciation and maintenance, etc). But it is, clearly, an asset and we understand that it will surely be assessed as one - even if the equity (currently about $250K) is, in truth, what we’re hoping to primarily rely on for our retirement.
We are currently working with a college planning advisor. And some of the information he is relaying to us seems to be contradicted by some of what we’ve read online - including threads on this site.
And so the question is: would putting this rental property into an LLC (partnership) “shelter” it from being assessed (on the FAFSA or CSS) as a personal asset…? My wife and I each run our own businesses (she a sole proprietorship; me an S Corp). So this rental income is certainly not our primary business.
The advisor seems to think creating an LLC for the rental property business would be prudent and, likely, prevent the house from being included in our personal assets.
Second, as an ancillary question, would our own businesses be assessed as assets?
If it were that easy, every owner of a second property who is the parent of a student looking for need-based financial aid would put the property in an LLC.
There might be prudent reasons for forming the LLC but I don’t think it’ll help you with financial aid.
You’ll still need to report the asset, it’ll just be reported as part of the business value rather than a personal investment. There’s a question on the FAFSA where you report business value. For schools using the CSS profile, there’s a business supplement that you’d fill out for each business which asks pretty detailed questions about business assets, expenses, etc. Most schools will want your 1120s for the S Corp (and yes, they’ll ask you to place a value on it) and probably the 1065 if you file that for the partnership. Your wife’s info will be on the schedule C but they’ll ask you the value of that business also.
So there’s really no hiding any assets in businesses. You’d be better off from a FA perspective with that equity in your primary home (at schools that don’t consider equity in primary home) or better yet in an IRA/401k.
This is an asset that you will need to report unless you sell it or give it away. You are asking colleges to give you need based aid so that you can hold onto $250,000 in home equity? That’s just not how it works.
The equity of your rental will be listed as an asset. Any rents you receive will be income.
In terms of your businesses…please understand that some deductions allowed by the IRS for tax purposes are added back in as income for financial aid purposes by some colleges. These include things like meals, travel, your cell phone, home offices and any expenses related to an office in your home, cars. This is because these are things you would have anyway…even if you didn’t own a business. For example, if you have a home office, you can make deductions for that for tax purposes. But the reality is…this is part of your house and the utilities and even the space are something you would have anyway.
IIRC, if your business employs less than a certain number of people, the value of the business is not reported on the FAFSA form.
BUT if your child goes to a Profile school, all bets are off…they can and do ask for financial information about everything.
As far as how your rental equity is assessed…for FAFSA purposes 5.6% of the equity will be added to your family contribution. So for $250,000 equity…about $13000 or so in addition to whatever your family contribution is based on your income.
For Profile Schools, they could assess 100% of the equity…it depends on the colleges policies.
But here is a question…is your income such that you would even qualify for need based aid? You are contemplating some financial gymnastics here…and really, if your income and assets are above a certain threshold, you wouldn’t qualify for need based aid anyway.
You might also want your student to look at colleges where they could get decent merit aid which wouldn’t consider your income or assets at all.
“This is an asset that you will need to report unless you sell it or give it away. You are asking colleges to give you need based aid so that you can hold onto $250,000 in home equity? That’s just not how it works.” - Thumper 1
So I didn’t say I was asking colleges to give me anything. I am trying to discern/reconcile what an advisor conveyed to us with what we’ve read - and heard (obviously here) online.
Clearly, we’d like to get college tuition assistance if it’s available. How on earth in this day and age can someone who makes over $110K be considered so well-off that they can afford to pay, what is it, 40%-50% of their income to pay for college?? We just don’t have the savings or income to afford that.
Of course that’s another topic and not something anyone here can practically speak to.
But if one wants to delve further into “how it works”, it seems we could have sold the rental house, and used the proceeds to a) increase our equity in our primary home or b) invest it into a retirement fund. Either way, that equity or that retirement investment would not have been, as I understand it, considered an asset…?
But for the sake of trying to improve our retirement position, we felt the rental house has a higher appreciation ceiling than our current home and that the real estate market appreciation where we live is likely to be “safer” and grow more than any retirement funds are likely to over the next 10+ years.
So why does inquiring if an LLC for the rental home might help “protect” our retirement investment seem to be viewed as something questionable v.s. putting the equity into an actual retirement fund or our personal home? Aren’t they, ultimately, doing the same thing? Shouldn’t they, in theory, be viewed the same way?
No. A qualified retirement account has the specific purpose of being used for, no surprise, retirement. There are account restrictions, with a minimum number of exceptions, so that the account funds are used for retirement purposes. Because pulling funds out for a child’s college expenses would result in financial penalties (in some retirement accounts more so than others), in my opinion it’s reasonable that qualified retirement accounts are not reportable assets when applying for need-based financial aid. An investment in real property other than the primary home is not comparable in this regard to a qualified retirement account.
I do not know how putting the property into a LLC is going to keep it off the CSS PROFILE forms I’ve seen. It might be possible—I just don’t know. If it works, let us all know. Do ask your financial advisor if he can illustrate the differences in how the asset will and won’t show up in a sample CSS PROFILE Form IF he does a lot of work in this area, he should have some examples available to demonstrate. Make sure it’s a PROFILE form from a university that your student might consider.
My very good friend was shocked to find out that his investments in the rental market knocked him out of consideration for any financial aid from HArvard. Didn’t get a dime. Never mind that the rents generated the bulk of family income and to borrow against them wood erode retirement assets as well beverage more monthly household payments. The family income was well under what Harvard would subsidize but the asset values of the rentals knocked thst out of any consideration. Friend is very savvy about these things and couldn’t come up with a way to deal with this.
as @thumper1 says, when you own businesses, PROFILE can add back a lot of your business deductions and depreciation. The schools also can assess your business as an asset. It’s very difficult to estimate what your net price will be at schools when Fsmiky businesses and busines assets are in the picture.
Nothing wrong with what you’re asking and yes, in theory they should be treated the same. They just aren’t though.
I think Thumper is correct about family owned businesses not needing to be reported on the FAFSA under certain conditions. I forgot about that. You could look into that as it might be what your planner was thinking. I’m not aware of great need based aid at FAFSA only schools though. Most of the really generous schools use CSS or their own form.
Colleges differ in how they treat equity in the primary home. Most look at it to some extent, some don’t at all. Most don’t expect retirement funds to be used for college.
A)Home equity is not reported on FAFSA, but it is on CSS Profile. Profile schools vary as to how much home equity they include in their proprietary calculations to determine need.
B)Retirement assets aren’t included in either FAFSA or Profile, but your annual contributions are added back to your income for both.
There are people who shield rental property income by classifying it as a business…see details at the link, toward the bottom. Rules are governed by multiple IRS publications (527 and 334). https://www.finaid.org/fafsa/smallbusiness.phtml
If you pursue the LLC strategy, I would get buy-in from your accountant and attorney.
If you think there is a possibility that the strategy can work, go on ahead and try it. Just make sure that your student also has schools on the list that are affordable as well as schools with merit possibilities that would make things doable if financial aid does not work out.
What kind of student do you have (stats, home state, etc)? Sometimes all this handwringing is for very little. What is the college adviser for? Is he a financial adviser, an accountant? Doe she have any qualifications to assume she knows anything much about FA?
Is your student applying to colleges that guarantee to meet full need for all…and is he is she a competitive applicant for these highly competitive school?
If so…this same student would likely find schools that will give significant merit aid. Any chance this student has the potential to be a national merit finalist? That would open up more merit aid doors. Merit aid won’t consider your income or assets.
If your student is applying to the vast majority of colleges that do not meet full need for all accepted students…then all bets are off. These schools do not guarantee to meet full need, and really your only guaranteed need based aid with a $110,000 income (is that gross or net?) is a $5500 Direct Loan for freshman year.
Adding…with all of your self employment and owned businesses…and rental property…the net price calculators on the college websites will not be accurate.
Thank you all for your input. We very much appreciate it.
Just to follow up on a few of your questions/comments, the last year for which we have a return, 2018, we had an AGI of over $110,000. This year (2019), it will be right around that again - possibly less. BUT that was before understanding that any retirement contributions made will be added back in. I guess I’m still not clear for which year, though, those contributions are added back in…? Is it the year we apply (which will be this Fall) or is it for contributions made during the proverbial “year before the year before” (2019)? Because we did contribute around $6,000 in 2019. But we haven’t yet this year.
As for the advisor, he is part of a “company” that our school recommended (amongst others) as an option to seek out advice on College Financial Planning.
And between his input, and what we’ve read on the FAFSA form itself, it seems clear that our businesses should be not “assessed” (or that we won’t have to give valuations for them), given we each own them solely and neither has more than one employee. The truth is it would be extremely difficult/challenging for us to put a value on either of our businesses; though I surely understand we’ll have to if we apply to any PROFILE schools.
But the rental home is another matter. And I guess I do need to find out more definitively from the advisor why he suggests that putting that asset in an LLC might be beneficial as far as FAFSA is concerned (clearly not for the CSS). It would clearly be defined (by the IRS anyway) as a business. But it obviously wouldn’t be our primary business. And I’m not clear if that distinction would matter to those reviewing a FAFSA form.
Lastly, our daughter is doing quite well academically, but it’s not clear that she has separated herself to the point that she would qualify for most merit based scholarships. Obviously, we can’t yet know that. The bigger challenge for us is going to be finding a school that might be more willing to give merit based aid and that she is INTERESTED in attending. And that is a problem/battle that no amount of forum input can remedy. We’re on our own with that…
Actually, this forum can be much more helpful suggesting merit colleges that your D might find interesting/exciting than we can be helping you restructure your finances. We can’t go back in time and help you figure out the optimal “saving for college/saving for retirement” strategy, but we can help you look forward and come up with a list of colleges which are affordable, your D can get admitted to, and will get her excited about her next steps!
Reportable asset values are as of the day that the financial aid form is completed. All other financial numbers (including qualified retirement account contributions) are based on the prior-prior year schedule. So for your kid who will start college in fall 2021, tax year 2019 will be key.
To be clear: you won’t be worse off for contributing to a retirement plan. They’ll just want to capture any untaxed income in their calculations, so in addition to asking for AGI, they’ll ask about any pretax retirement contributions or other untaxed income. If you contribute to a Roth it won’t be added back because it is not pretax. Employer contributions to SEP or solo 401k might not be considered at some schools.
As for business value, if this is a simple freelance or consulting type setup without inventories or much equipment, the value won’t be much and probably won’t affect aid much at all. Think about what you could get if you sell the business quickly.
What was your gross income? You don’t have to post it here…but what was that in 2019? Really…estimate that 1/4 to 1/3 of your gross income will be your Family contribution.
I agree with @blossom. Folks here can be very helpful with college suggestions…and affordability…if given the college criteria (location, size, possible major, etc), the student stats (SAT or ACT and GPA), and an estimate of what the family can contribute annually.