We have a rental that has about $75K in equity and rent brings in about $25K a year. Our renters just gave notice and we have been thinking of selling is for awhile. How is income treated vs. assets when schools calculate financial aid using the CSS Profile? Planning for next year…
Is your kid already in college (or has been admitted and is deciding now)? Then ask at the financial aid office(s) about their specific formula(s).
If your kid is just starting to look at colleges, then run the Net Price Calculator at each website using both sets of numbers.
My understanding is that the equity in the rental will be treated as an asset which will raise your EFC by 5.6% . The rental income will also raise the EFC.
If you sell the asset, you will still have the same dollar value asset except as cask so that is a wash. Losing the income will lower your EFC but most college gap.
Is the 25K return after expenses? You have a 75k asset generating 25K in income which appears to be one heck of a return. Can the you do better investing the 75K?
If you have normal 9-5 jobs, run the NPC without the rental and see what you get. If you receive little to no aid then selling the rental to avoid income makes no sense. Running the NPC with the rental income might not be accurate since many schools will add back you rental deductions. This will highly likely for profile schools.
If you sell the rental property and realize a capital gain on the sale, that gain will be reportable income for the year of the sale. Generally when determining need-based financial aid, income is given greater weight than assets in assessing a family’s ability to contribute to college costs.
^Schools are not going to add back ALL of your deductions, so it’s important to have more data before making any rash decisions.
^^ not correct.
profile colleges will!!
Each profile college readds them in in their own way- some a bunch, some very little. There isn’t a universal formula.
The problem is you will not know what a college will do until they do it. The NPC is your best guess. However the NPC will only tell you how they treat the asset (can you possibly consider the rental a business in some way, business assets according to some sources is treated a little more kindly as an asset but not sure if it is worth it if you have to change how it is titled).
As for income, most rental property owners deduct expenses, taxes and depreciate their property so that 25k will be much lower by the time your accountant is done, or is that already your net income? The question is whether CSS colleges will add back in the depreciation and other similar…
However I am a little confused on your numbers. Is your equity in the rental 75k or is that what it is worth gross? What would you sell it for? What is your basis after depreciation recapture and factoring in expenses?
The 25k rental income is that what you net after expenses or gross? If it is gross what do you net?
As someone else said, 25k on a 75k investment is a great return. The question is what are your carrying costs if you do not get another tenant soon?
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Thanks all. Financial aid is so confusing for 1st time parents! I’ll go see an accountant, more complex than I originally thought 
You will still have to do some research on your own. Accountants are great but many are not familiar with NPCs, FAFSA or CSS Profiles and the impact of financial decisions. You may want to print out a copy of the CSS Profile for a school you are interested in and he/she can see what you will be asked to report.
Is your child a jr this year? Or sr?
I would hold off selling until the kid is out of college- IF you will be applying for FA when he applies to college. That way the one time hit of what ever you sell the property for will not be counted as income.
- You DO know that if you need FA you WILL have to reapply each year he is in colleges, correct?
I’m really confused - they currently have a $75K asset. If they sell it, won’t they then have $75K in cash? Is that counted as income AND an asset in the same time frame? Also, it’s currently a $75K asset with gross rents of some amount that is income. Wouldn’t it be better just to have $75K in cash and not the rents, as far as the CSS is concerned?
As far as actually paying for college, it seems like it would be better to have the rents coming in rather than hoping to get that made up for in aid. Especially if the gross rents are a lot larger than the $25K mentioned.
If she sells, presumably she will have spent some of that money or maybe put it into an IRA by the time it is time to fill out the FAFSA or CSS. They only ask how much cash you have TODAY, not what you had last week. If she does not spend it or needs to save it then she will have 75k in cash which is the same as having 75k equity in a rental.
Roughly 75k in assets will cost about $4237 in aid a year after the base allowance is used up.
Net income of 25k will cost about $5000 a year in aid ($income is tapped at 20-25% although it can vary in formulas and that is after the allowance.)
In the year she sells how much is income will depend on her profits. For this the $75k number is not important because according to the OP if I understand correctly, 75k is her equity not what the entire property is worth, presumably that is more and profit will depend on the purchase price and the selling price after deducting expenses. So only OP knows what her potential profit would be, we do not have that information. Further, the capital gain may be significantly higher if there is depreciation recapture
Isn’t the equity (for FAFSA/CSS) defined as what you could net if you sold it today? In that case it would be $75K? (just going from her numbers)
@xaniamom You fill out financial aid forms for assets as of a certain date, so if you’ve sold an asset, it no longer exists, but you’ll (presumably) have the cash instead. It can be complicated because of capital gains on your taxes, etc, but the basics are the same.
@NCmom14 the answer really is that it depends on your school(s).
If you are attending a school that uses the CSS Profile, then chances are that the FA officer at the school has seen several variations of folks who have used this type of asset as an investment over the years, and they should be able to tell you how they would treat your situation hypothetically if you took different actions.
Be up front with them, you understand that this investment was made in part as a savings vehicle toward your child’s education, and since you were thinking of selling anyway (it is not uncommon for parents to no longer be able to maintain a rental property asset if they no longer have their own kids at home to look after the primary residence), you just want to be sure you are making an informed decision, thinking about all the potential consequences, etc. Be clear that you are not looking to them for investment advice, just potential FA implications related to different possibilities. There often are legit other reasons to unload a rental property - as we get older the stress and upkeep can be harder, losing a tenant can be very stressful, etc. The FA office will usually not immediately think you are trying to unload a property to maximize financial aid. At the same time, if you keep the property and next year you will only have 8-9 months rent instead of 12, plus some remodeling expense, etc., sometimes the school will understand this will make it difficult for you to contribute as much toward the parents EFC.
And of course, whenever you speak to a FA officer at any school, remember to use the occasion to thank them and the school for their assistance in helping your child afford such a great school. Too often folks tend to think of the FA office as adversarial, when in reality, most of the time they are very very helpful and glad to be able to be a partner in the process.
^^^ Absolutely this. I’ve spoken with a bunch of people in FA offices, and you can tell they’re grateful if you understand that they’re human and you’re nice to them. It must be an exhausting job.
@xaniamom
“Isn’t the equity (for FAFSA/CSS) defined as what you could net if you sold it today? In that case it would be $75K? (just going from her numbers)” I was not sure she was using the FAFSA definition of equity, perhaps she was listing her initial investment or how much of the mortgage was paid off.
For example, if she bought this 10 years ago for 100k and put nothing down and paid the mortgage so now there is 75k of equity, over the years she made 10k in improvements and when she sells the house is only sold for $110k because it is a depressed area, she will come out even but will take home a check for $75k tax free. This is a simple example which assumes she never depreciated the house (which is unlikely). However, in this case her equity might be 75k but her profit is 0 and so there would be no capital gains income. Again in real life you depreciate a rental which you have to recapture when you sell.
For the pure FAFSA definitiion of equity, yes you are correct except what she ends up getting may be more or less than that depending on the market, it is just a best guess until the property is sold. So I take it back it has importantance but may not determine her entire capital gain (taxable income on sale) since she may have expenses and capital expenditures on one side and depreciation recapture on the other. Bottom line the answer is complicated and she should sit down with her accountant to discuss her options.
Even if she nets 75k because she has paid down the mortgage, made a down payment when she bought or prices have risen substantially, her profit can be more or less than that and it will be considered income.