I think I’ve really screwed up FAFSA and I’m still not done with CSS/Profile. With many special circumstances and still missing tax forms I don’t know where to turn.
I’ve read that small family business may be excluded from FAFSA. One parent owns 100% of an LLC which owns condo property. It’s deeded to the LLC. This business never got off the ground and now the property the LLC owns does nothing but cost money in upkeep and utilities. There is no LLC income - only losses and costs that come from family cash.
How does this business/property go down on FAFSA. Does it qualify for small business exclusion? Likewise for CSS/Profile. Is it family property? Business property? Asset? Is it SQ-111 or SQ-122 or both?
Really- this property is a cash draining liability.
I believe that the condo if owned by the business is excluded from FAFSA if the business meets the small family business criteria. Read up on the provisions.
For PROFILE, that’s a whole other story. The market value of the business will include the market value of that property. Whether it is cash draining or not, is not the issue. Many properties are cash draining. Apparently the property your family LLC owns is not yet cash draining enough that your parent will sell it or just give it away if it truly has no value.
We have a cash draining property too. If we were filling out PROFILE, it would have to be listed at its net Market value.
That property owned by the LLC may be getting depreciation and writeoffs that are likely to have to all be added back to income as well, when it come to PROFILE But you likely will get a pass from FAFSA for it.
I woudn’t think you could stick a rental property into a single member LLC and call it a family/small business. Is this on 1040, Schedule E, page 2 as a rental property?
How much is the equity?
I’d consider this an asset, not an excludable ‘small business’.
Many schools that are CSS Profile schools will want the business/farm supplement document (also a College Board form). It asks what type of corporation it is, and what % the parents own. So a single owner LLC status would be revealed in that paperwork. That is where the info on the LLC and its assets, losses/earnings, etc. would go. There is also a space on the form for “remarks” to clarify if there are some extenuating circumstances. Or the parent can also write a letter with additional information to the financial aid office (I did this myself one year).
@Madison85, I don’t think there are any legal obstacles to creating a single owner LLC that just owns one rental property. It is a small business if they do that, but the IRS does have specific rules about single owner LLCs (disregarded entities, where the taxed entity should be the single owner beneath, not the LLC at the top level). But there is no reason it can’t (or shouldn’t) be done, IMHO.
Think about this: if the LLC is not making money and it hasn’t for some time, the IRS and perhaps the FA folks may say that it’s not really a business, and therefore the expenses are not allowed to be claimed as business deductions (for tax purposes) and the asset is not allowed to be excluded (for FA purposes). Otherwise, what’s to keep anyone who owns property other than their primary home from forming an LLC (cheap and easy) and deeding the property to the LLC so that it doesn’t show up on FAFSA?
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Think about this: if the LLC is not making money and it hasn’t for some time, the IRS and perhaps the FA folks may say that it’s not really a business,
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Right…I think at some point it’s called a hobby.
I too wonder about the legitimacy of calling one rental a “business”. If so, why wouldn’t every one do that with their one rental?
I am not a tax professional (but I sleep with one - lol). I believe in order for rental property to qualify as a small business under the FAFSA exclusion one has to provide services in connection with the property.
My understanding is that LLC ownership does not change the characterization of the rental property, and it will still be reported as rental income/loss.
Financial aid (FAFSA + Profile) will treat the rental property as an asset, and will reduce the loss by not recognizing the non-cash expenses (like depreciation and amortization).
It isn’t uncommon for rental property to show a loss for many years even though the property is cash flow positive.
You can do so, but it will come out in the financial aid process through the business/farm supplement. You still wouldn’t list it as a “personal asset” or whatever that section is called on the CSS (don’t have it handy right now). People do it for tax reasons – for instance, if there is an accident on the property and the LLC is sued, I think the owner’s personal assets would be shielded from the lawsuit. That is one of the reasons people create corporations. My brothers and dad used to own ONE condo together in an LLC.
Business owned assets are not included on FAFSA. Whether the business qualifies for the FAFSA exemption and whethe the ownership of the condo by the business is considered legit, is a whole other story. I know any number of small business owners who have all kinds of assets in their businesses that are not included in the FAFSA.
PROFILE is a whole other story. Doesn’t matter if ownership is a losing financial situation. Most property ownerships are. My MIL owns a whole lot of properties that it costed her to own because she did not want to get rid of them for the prices she could get. Actually, many homes are money pits. Many of us lose money on properties.
If that property is such a stinker, it should be sold to cut those losses. Too bad not done sooner, as the year of the sale will show income for PROFILE purposes . A lot of depreciation, write offs one gets on taxes, one has to add back in for PROFILE. People with small businesses tend to scream bloody murder at PROFILE results.
Yes, small business assets are excluded under FAFSA. But the question is whether a LLC or other entity that does nothing other than hold or lease real estate is considered a “small business.” If the entity is simply holding the real estate, the answer is no. If the entity leases the real estate, the answer depends on the related activities. Most rental properties do not qualify as small businesses. If it doesn’t qualify as a “small business”, then the net value of the asset is reportable on FAFSA.
Income derived from rental and adding back in depreciation and other deductions is a whole other story.
@intparent - I think you meant to say that people do it for liability reasons. Most LLCs, for tax purposes, are disregarded entities.
Again, the LLC or whatever this business, has to qualify as a small business under FAFSA definitions. My friend did have properties, rentals owned by her business that qualified just fine and did not have to be reported for FAFSA. Owned all kinds of property in trust and by business, and got PELL for her kids, was verified and audited one year thoroughly and passed with flying colors. it was all fine. But not by CSS PROFILE. Didn’t get a cent from PROFILE schools out of their funds despite being PELL and low income state grant eligible.
@cptofthehouse - I think we are in agreement. I’m not saying that rental property can’t qualify as a small business - just that one needs to meet a higher test than just owning the property in the name of an entity.
@intparent - yes, you are correct that a disregarded entity is the default classification for a single member LLC. Multiple member default would be partnership taxation. Either can also elect corporate tax treatment. The beauty of a LLC.
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At times a student or parent will claim rental property is a business. Generally, it must be reported as real estate instead. A rental property would have to be part of a formally recognized business to be reported as such, and it usually would provide additional services like regular cleaning, linen, or maid service.
This note mirrors the language from “How To Report Rental Income and Expenses” on page 16 of IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes). This section of Publication 527 discusses whether rental income is reported on Schedule E or on Schedule C or Schedule C-EZ of IRS Form 1040. In order to file Schedule C or Schedule C-EZ, the taxpayer must “provide significant services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service”. It continues “Significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc.”.
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Ahh!
I wonder how often the “changing linens” and “maid service” need to be?
Frankly, I dislike the fact that FAFSA doesn’t include small businesses.
Also…a few years ago, someone said that they kept their savings in their small business so it didn’t count on FAFSA…if that’s possible, then that’s another reason it’s a big loop hole.
You know, all this Hoopla about what is in the FAFSA is just that…hoopla. There are no FAFSA only schools that guarantee to meet full need for all accepted students. university of Chicago is close, but even that school has a short form of their own that they require in addition to the FAFSA.
The Profile schools are much less forgiving about small businesses and rental properties…and business expenses. Some of these schools absolutely will require you file the business/farm supplement with them. They will scrutinize your IRS allowable deductions…some of which will be added back in as income for need based financial aid calculations.
Not likely to get a lot from FAFSA only school in terms of need packages anyways. No school guarantees to meet full need based on the FAFSA EFC. But, yes, a small business can shield asset from FAFSA and other things as well, that are more ominous IMO.
