How does my rental property affect my EFC in the future?

Paying for College
1

Judging from previous posts, I got accepted to USCalifornia on a 28k income. However, due to certain events we didn’t have rental income coming in this entire year, but there’s a high chance that we will have rental income next year.

The equity of our main residence is 30,000, and the equity of the rental property is roughly 160,000. We generally charge around 900 a month for this rental property, but right now we need to fix it up to rent it out (roughly 4-5000 in repairs)

HOWEVER, the reason we rent this property is to mainly pay off the property tax, which is 7,000. My provider says that after this the 28k increases to 31-32k, because that’s the actual profit we’re earning. But this makes me nervous.

I’m afraid that USC will just see the extra 10,000 and then slash my aid in half. leaving me financially paralyzed.
Right now my actual financial aid package is showing roughly 56,427 in combined federal aid/USC aid/Work study. Based on the net price calculator, an increase from 28k to 38k will result in an decrease of 8,000 from my aid, which to me is just too much, but I understand that the net price calculator is very rough in calculation, and is not the greatest tool to use with more than 1 property.

So ultimately, I need to know whether with USC, which uses both the CSS and the FAFSA, will calculate that loss of 7,000 from the 10,000 earned through rent, or no?

Should my provider just not rent out this property for the next 4 years? With that extra 7,000 in taxes, that really is hard for them to do.

Thanks for all the help.

2

Even if you don’t have rental income from the rental property this year, you still have to report the equity in the property, since you own it and it is not your primary residence I would think.

Did you? How did you get federal aid with $160,000 in investment assets, or did your family have really low income where assets don’t matter? But USC uses profile as well so they wouldn’t have ignored it.

3

Yeah, we did report everything, and frankly I’m not very educated on this entire process, but we did report everything.

4

You said your income was $28,000 in 2015? And you have an investment asset worth $160,000? What was the EFC calculated by the FAFSA?

5

I used the Collegeboard efc calculator for family of 3 in CA and making $28,000 with $30,000 primary home equity and $160,000 investment property equity.

The federal methodology (FAFSA) EFC was $4,252 and Institutional methodology (CSS profile) EFC $7,868

So did you get about $1,500 in Pell grant?

If you run the same calculator with $38,000 income and same equity numbers the federal EFC goes up to $7,152 and institutional EFC to $9,622.

So looks like you will lose Pell grant but institutional aid might not change as much?

I would ask USC how much an increase of $10,000 in income would affect your USC grants.

2015 income will be used on 2016/17 FAFSA and on 2017/18 FAFSA. So your income from 2016 will be reported on 2018/19 FAFSA and 2017 income on 2019/20 FAFSA.

I don’t know how they will treat your $7,000 “loss”.

But best thing would be to ask USC about this.

6

Allright, thank you!

7

Parent assets only count 5.65% so it is completely possible to get FA with 160k in assets depending on income.

I have no info on USC, K1 did not apply. The following are just suggestions of areas to explore, not recommendations.

Does filing a 1040A or EZ help you or is that only with FAFSA? On FAFSA if income is below a certain number and you are eligible to file other than a regular 1040, your assets are excluded. Is it worth it if you lose deductions? However, I do not believe CSS does this anyway so may not help but you can look into it.

Does USC calculate home equity? IDK but if they do not then what about using the 160k equity in the rental to pay down the home mortgage and increase equity there? Obviously run the numbers, the NPC (first thing to see if it helps) and check with your accountant to see if this works for you. Just something to explore. Is the rental considered a business or investment? If it is business then its assets are treated differently and count less but not sure exactly how this works, another FA office question.

If you rent this out middle of this year income will not increase as much since it is only a half year of rent plus you have expenses of repair you mentioned. Those can be deducted from rental income on a 1040. Increased income will catch up with you eventually.

General question, will 2017-2018 be on prior year or prior prior year? If it is on prior prior year then they will still look at 2015? Is this correct? Then how much does 2016 income matter for 2017? Obviously will matter for 2018 -2019 but that pushes it back to junior year? Is this correct? IDK but a question.

8

Yes, 2015 will be used for 2017/18 FAFSA, I’m not sure about CSS profile.

9

This is as much a tax question as financial aid. Do you report your rental income/loss on a Schedule E? Your profit/loss is what matters, not revenue. There are limitations to losses on passive activity. Talk to an accountant fro more information.

That aside, if you don’t rent the property and lose $7,000/year (real dollars, not tax loss) in order to save a $1,500 Pell Grant, that doesn’t make financial sense. You need to look at how to pay for college, not necessarily how to maximize grants.

10

I’m not a tax expert but I don’t think you can do a 1040A or EZ when you have rental properties.

11

@Sportsman88 makes excellent points. It sounds like an accountant is the first person to talk to. Maybe bring your CSS and FAFSA forms with you so he can help show you how they will change depending on what happens with the rental.

12

We have used several accountants…and not ONE of them has known a single thing about the FAFSA or thr PROFILE. I’m not sure this is the expertise of most accountants.

13

But an accountant knows the difference in profit and revenue. Is the accountant saying that renting the property will increase your AGI by $10,000?

14

Are you talking to tax preparers designed for simple returns or a EA/CPA? They are not in the same ballpark.

15

not sure how someone can predict rental income impact now…for a property that currently isn’t rented, needs repairs, etc. these are all taken into consideration on the schedule dealing with the rental. None of these numbers are available yet for the OP for that rental.