Land Sale and FAFSA

Paying for College
1

<p>We are in the process (still the "think" stage) of selling the farmland which is part of our primary residence. The land is worth about 10 times more than it was when we originally purchased it many years ago and since it is just land, not much can be subtracted for improvements. We are both self-employed and have very little in our retirement funds, so this is being done basically to put away for retirement. We have one who is a freshman in college and another a Jr in HS. A few questions on doing this to minimize the impact on FA. At this point the freshman receives Stafford loans, a Perkins loan, a college grant (private college), TAP and college merit scholarship.
1. How will this sale be counted on the FAFSA? Income or asset?
2. The sale will be after we file the FAFSA this year, so I am assuming I will not have to amend the FAFSA to include anything about it, and that it will impact the FAFSA I file in 2014. Is this correct?
3. Since this just became a possibility this weekend, I have not had a chance to speak with anyone regarding how this will affect our taxes and how much we can stick in our IRA's (which we have been unable to contribute to in about 10 years). Does anyone know about contributions and "catch-up" contributions to IRA's with the new tax laws?</p>

<p>Any help anyone can give me would be great! Thanks in advance.</p>

2

<p>If you are going to sell it this year, file the FAFSA before you sell it. It will greatly increase your income for 2013, so run your numbers and be prepared to spend a lot more for college in 2014-2015.</p>

<p>Someone elsi will have the IRS publication number handy, but you need to read through the one with information about SEP, SIMPLE, and KEOUGH retirement funds. It is years since any if us had enough self-employment income to put into a SEP, but as I recall, you should be able to max out your SEP, your regular or ROTH IRA, and any age related “catch-up”.</p>

<p>If this is a ginormous amount of money, and you won’t need it for a while and you have a good financial advisor to help you think through all of the options, buying an annuity or a whole life insurance policy might be an option. Those are tricky. Get expert help if you head down that route.</p>

<p>I like “Personal Finance for Dummies”. You should be able to find it at your library.</p>

<p>Good luck with everything!!</p>

3

<p>Maybe the percentage is lower, but just owning farmland affects your financial aid. Seems like it was a specific question on either FAFSA or CSS. All I know is it kept me from getting aid in the day since the formulas seem to assume you can liquidate farmland at a moments notice to pay for college. Farmland is hard to sell! (BTW, my family still has lots of farmland that we need to get rid off if anyone is interested:))</p>

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<p>happymom: thanks, I will look up the book!
scmom: not sure what state you are in, but right now farmland in our state is like liquid gold! We rent our farmland, and claim the rent as income, so from researching this a few years back, and having been involved with FAFSA only schools, this has not effected their aid.</p>

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<p>scmom12:
OP says the farmland is part of their primary residence so I assume that means its value does not need to reported as a separate asset on FAFSA.</p>

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<p>Not an expert on land sales but some thoughts to ask an expert.</p>

<ol>
<li><p>Pretty sure any part of the sale that is taxable will hit FA as income for the year following the year you sell it and when the money is invested will be assets going forward. FAFSA will ignore amounts in retirement accounts. I’m not an expert at all but I think selling price - basis - selling expenses = taxable amount. I don’t know if there is any special treatment since the land is part of your primary residence.</p></li>
<li><p>If you sell it this year, the income part will affect your college student for the 2014-15 fafsa/css. It will also affect your HS student as 2013 will be the base year for her too if she is starting school in fall 2014.</p></li>
<li><p>Don’t know anything about SEP/KEOGH/SIMPLE but for IRAs contributions are limited to your earned income as well as being limited by contribution limits. If your self-employment is lucrative that’s not a problem. Here’s a link to catch-up contribution limits. For IRAs it is only $1000 each if you’re both 50 or over.</p></li>
</ol>

<p>[Retirement</a> Topics - Catch-Up Contributions](<a href=“http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Catch-Up-Contributions]Retirement”>http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Catch-Up-Contributions)</p>

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<p>annoying: that is a lot of what I was thinking. I will look up the link. Will also consult with our book keeper about all of this! I hate money matters!!!</p>

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<p>dlbarber – If you haven’t already done so, I’d suggest you make an appointment with a good tax cpa – understanding the consequences of the sale – and figuring out how might be the most beneficial way to handle it in your circumstances may be a much larger issue than FAFSA. Planning ahead on this one could have a huge impact on the results.</p>

<p>If you sell the property in 2013 as a regular sale, you’ll have money in the bank at the time you file your FAFSA unless that money has been plowed into resources that are not countable for FAFSA purposes (like retirement accounts, paying off the mortgage on the family home, paying off other consumer debt,…). Whatever’s left when you file in 2014 will be assessed for FAFSA purposes at 5.6% for money above your asset protection allowance (figure about $48K protected). So, if you have $300K in countable bank accounts, investments,… above that allowance, then your EFC will be $16,800 higher than it otherwise would be. </p>

<p>You’ll also have (probably) income to report on the gain from the sale, some (most?) of which will be capital gains – but there may also be recapture of depreciation on farm equipment, and a bunch of other income-affecting items. </p>

<p>To really get a full picture of how this might work for you from a FAFSA perspective, a tax CPA could run a pro-forma 2012 (because those are the forms available) tax return assuming the most likely sales terms, and then you’d be in a good position to know how it will affect your FAFSA by using the forecaster tool. </p>

<p>But I’d really, really suggest some tax counsel before making the decision on how to structure any sale.</p>

9

<p>Thanks arabrab! So the money would be counted as income for 2013, and also as an asset (anything over about 48,000) for 2013? Just to clarify that?
Will definitely be contacting tax people this week so when the potential buyers get back to us, we can propose what we want to do to minimize the taxes.</p>

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<p>If you are selling it to have money for retirement, why don’t you just hold onto the land and sell it when you retire?</p>

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<p>dlbarber – sent you a pm.</p>

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<p>

So how can it be considered part of OP’s primary residence and not count as an asset for FAFSA? Could I use all my assets to buy up all the property adjacent to mine and rent it out and claim it’s part of my primary residence? Is so, the FAFSA rules are even more absurd than I thought. OP owns very valuable, income producing property. Why shouldn’t it be deemed available for college costs, just like any other asset?</p>

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<p>Family farms are excluded as assets for FAFSA if:

  • The family owns >50% of the voting rights for the farm business
  • There aren’t >100 employees
  • The family works the farm.</p>

<p>It can be a huge farm, but as long as those tests are met, it is excluded.</p>

<p>So, a farm that houses the family home and that is used by the family to grow soybeans, corn, ranch… (a farm that the family runs) is not a FAFSA-reportable asset. But, when the part of the land used for farming is sold, the income from that sale is reportable as income for FAFSA purposes that year, and any proceeds that are in countable assets when the next FAFSA is filed are assessed at the asset rate after the allowance.</p>

<p>But, if the family lives on the farm and leases out the acreage to someone else to farm, the family is no longer materially participating in running the farm. (They become a landlord, in effect.) At that point, the value of the farmland they lease out becomes a reportable asset, just as if the family owned a rental home that they rented to tenants.</p>

<p>If the family partially leases the farm (say, the grazing acreage) but still directly farms the hayfields, they’d report as an asset value only the part leased for grazing. If they get a flat rent, they’d probably report the income (less expense) on a schedule E of the taxes, which would get treated like rental income.</p>

<p>More complicated is if the farm owner gets some kind of shared production (say, 50% of the hay) or somehow participates in working the leased property. How that would be handled would depend on the specific circumstances. I could see that one working a couple different ways depending on the degree of involvement.</p>

<p>I’ve seen similar situation with families operating a farm who receive royalties for mineral rights. The farm part of the farm is not included as an asset, but the sales value of the mineral rights has to be reported unless the family itself is operating the oil/gas extraction.</p>

<p>At least, that’s my understanding.</p>

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<p>That makes total sense, arabab, and suggests the OP is not reporting assets correctly.</p>

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<p>If you can hold off selling it until your kids are further through school, you may save alot of money… It sounds like you are going to have significant profit (counts as income) and a large future increase as assets. Not that much can be sheltered in qualifying retirement accounts and some of that gets added back to income anyway. Pray land values continue to rise in your area and sell when the youngest is almost through.</p>