<p>What I meant was, it’s not an expense that you write a check to pay for, like the insurance or a water bill.</p>
<p>
We are supposed to depreciate the appliances, carpet, capital improvements if they are not emergency repairs (like water coming in the roof), etc. If I have to buy a refrigerator and it isn’t an “expense that I write a check to pay for” then what would you call it? Free?</p>
<p>ETA: If you know a place where we can get free appliances and capital repairs please PM me immediately.</p>
<p>You are not looking at this from the school’s point of view.</p>
<p>You could reasonably view a refrigerator as an expense that is accounted for over multiple years by taking a depreciation deduction, but the Profile doesn’t really care about about how you invest your assets, it cares mostly about this year’s cash flow.</p>
<p>If I take $500 and buy a fridge (or a car or anything), my assets are reduced by $500, and this shows up on the Profile in the asset section. It doesn’t affect your gross income in any way.</p>
<p>Why should the school give you an income deduction for your decision to invest in an asset?</p>
<p>You don’t get a deduction from your income on the Profile if you buy a fridge for your own house, why should the they give you one if you buy a fridge for a rental?</p>
<p>You could say “well I have to spend that money in order to make money from the rental”, that could apply to lots of things - you have to make car repairs to your car so you can get to work, but you don’t get a deduction from your income on the Profile for that. You don’t get to deduct mileage for driving to your job, either. So why should you get to deduct that on the Profile for your rental?</p>
<p>How much is the duplex worth if you had to sell it? (Now, without doing anything to fix it up for sale?)
How much do you owe on the mortgage for the duplex?</p>
<p>If the duplex is worth $300,000, and your mortgage balance on the duplex is $100,000, then you’ve got a $200,000 asset in they eyes of financial aid. On the other hand, if you have a duplex worth $250,000, and a $220,000 mortgage, you only have a $30,000 asset to consider.</p>
<p>
Please explain how you define “cashflow”. </p>
<p>If the refrigerator is an asset, how are your assets reduced by $500 when you have the refrigerator asset as opposed to the cash asset?
Why do we get to deduct them on our income taxes? How is that any different? We can’t deduct the maintenance on our own home either, but we can deduct the maintenance costs for rentals.</p>
<p>
Personal property isn’t counted as assets IIRC.</p>
<p>
You only get to deduct them because that’s the tax law that Congress voted in, not because there is some inherent “correctness” about the deduction.</p>
<p>A private school is under no obligation to follow the tax code as to the definition of income and what deductions you can take against income.</p>
<p>Look at it this way:</p>
<p>You take a second job that pays you $2000/month in wages. You have to buy $500 worth of suits because the job requires it, and you drive 5,000 miles a year to get to this job.</p>
<p>or</p>
<p>You buy a rental property that pays you $2000/month in rent. You have to buy a $500 refrigerator to rent it, and you drive 5,000 miles per year to manage the property.</p>
<p>Both give you $24K/per year in income. You don’t get to deduct your clothes or your mileage from your income for a job. But you do get to deduct the fridge and the mileage for the rental.</p>
<p>That is because the tax code treats these situations differently. Why should the school? As far as they are concerned you have an extra $24K in income. Your expenses are not their problem.</p>
<p>
So do they do that for other businesses as well? For example suppose you own a restaurant. Your gross sales are $2000/month. You have to spend $500 on food, and $100 to pay the dishwasher and the cook. As far as the school is concerned you have an extra $24K in income. Your expenses are not their problem.
Do you feel that we should be taxed on the gross rents then? And is that how you define “cashflow”? Irregardless of the expenses? At what rate would you tax them?</p>
<p>
I’m sure they do, it’s been reported on CC many times that the self-employed and small-business owners get penalized in the FA process over this very issue. Unfortunately, the schools don’t publicize exactly how they adjust expenses, and I’m sure it varies from school to school. And I’m not saying they add back in every expense.
I’m not advocating for any particular taxing system, just trying to explain that the schools are not bound by the tax code when they calculate your income for the purpose of giving away their own money.</p>
<p>As far as my definition of cashflow - I put capital investment (which is anything depreciable) in a separate category. Cashflow to me is net income before taxes + noncash charges such as depreciation. Investments are made from the profit, which is cumulative cashflow. Not an accountant though, so I have no idea if these match the standard definitions or not.</p>
<p>
The problem comes in what is considered an investment and what is considered an expense. If a school uses the tax return values for expenses vs depreciation then they are, in effect, using the IRS’s somewhat nebulous definitions of expense vs. capital investment. </p>
<p>Also, appliances being used as part of the rental operations are most definitely assets, and not “personal property”. It would be difficult for property owners to separate the value of their property into “appliances”, land/building, carpets, etc. Nowhere on any forms do they ask anyone to attempt this.</p>
<p>As it is, it appears that Profile double-counts rental income/assets in some way or other. Not saying they can’t do what ever they want, but rental property owners should be aware that their situation is likely to work against them.</p>
<p>
This is called “segmented depreciation” or “cost segregation”. The IRS doesn’t ask you to do this because they would much rather you depreciate everything over 27.5 years instead of accelerating the depreciation of assets with shorter life spans. But it is a perfectly legitimate thing to do.</p>
<p>I only did it for one building I have because in most buildings I have acquired everything was old (it’s not worth it to separate out a 15 year old fridge worth $50), and it does cause extra paperwork. There are web sites that can help with this.</p>
<p>
No, that’s not what I was referring to. We separate our depreciations all the time, and the IRS is very specific on how to separate them. You stated above that if I bought a fridge for $500 then it would show up as reduced asset of $500. I asked how having a fridge asset was different from having a cash asset, to which you replied that the fridge was “personal property” not counted as an asset. However, the value of the rental in the Assets section of the profile would include the appliances.</p>
<p>Clear…</p>
<p>Just because you are using the fridge in a rental property doesn’t mean it is no longer personal property, it just means you can depreciate it. Well, maybe that depends on if you use an LLC or trust or whatever to hold the ownership. I don’t.</p>
<p>
Replacing a fridge with a new one that costs $500 does not magically increase the value of the entire building by $500. It is not a zero-sum game. In fact, I don’t really think it changes the value at all, unless maybe there was no fridge there before.</p>
<p>I can’t even count how many mortgages and refi’s I’ve been through, each with their own appraisal, and never once has the condition of the appliances been a specifically-identified factor in adjusting the value. You are talking a fraction of one percent of the total value. It is not possible to be that accurate on an appraisal.</p>
<p>So, in my opinion, if you spend $500 in cash on a new fridge, it lowers your countable assets for FA purposes by $500. But if you want to add the $500 to the value of the rental, feel free. I wouldn’t.</p>
<p>
I’m not seeing the difference between “lowering your assets by $500” and “lowering your net income by $500”? Except wouldn’t it only come off my assets if I hadn’t spent the $500 elsewhere (groceries, say) and still had it in an account or something?</p>
<p>You guys lost me a ways back and I have rental property. A $500 fridge is a $500 fridge. It’s $500 out of your pocket. It doesn’t add to the value of the rental asset and you can depreciate it or not depreciate it, expense it or not expense it. $500 out of your savings on the day before you do your finaid paperwork probably isn’t going to chance your EFC for FAFSA or mean anything much to a profile school. You’re not lowing the asset of the rental property by putting in a fridge and probably not increasing the value of the property. Calling savings/checking assets is a stretch…like sylvan say’s it could be $500 in groceries or $500 to a medical office or $500 to fix your car. It’s $500 you have one day and don’t have the next.</p>
<p>I think what notrichenough is saying is that the school doesn’t care what you spent the $500 on, even if you had to spend it on a refrigerator for your rental. The whole thing isn’t that consistent since if the depreciation is the only thing they add back in, then they would allow for expenses such as advertising, cleaning, paint, and so on. In such a case, the depreciation DOES represent money you actually spent, just that they don’t want to count that. And of course, the school can count or not count whatever it wishes.</p>
<p>
Yes, which means you report $500 less in assets when you will out the FA forms. Your assertion that “Calling savings/checking assets is a stretch” is false, there is a line on the FA forms in the assets section for the balance in your savings/checking account on the day you file the form. It is absolutely an asset.</p>
<p>The tax code lets you deduct the value of the asset used in a rental from your income over time via depreciation. Profile schools may or may not let you do this, by adding the depreciation (or some part of it) back into your income. They may also add back in other expenses you’ve claimed such as mileage or repairs costs or who knows what else, the schools don’t say. It’s their money, they can make up whatever rules they want.</p>
<p>Yes, $500 in assets makes very little difference in FA - $25-30. $500 in income can be worth $250 or so, still pretty small in the grand scheme of things.</p>
<p>The killer is when the depreciation from the actual buildings gets added back in. I just went and added up the depreciation I claimed last year, and it was north of $40,000. This could add $20,000+ to my Profile EFC if it was all added back in. If the school disallows other expenses, it would be even higher.</p>
<p>I see. Yes I agree if you have a large depreciation amount and they add it back in it could make a large difference. We don’t come near $40,000 of depreciation because our basis is quite low in our units so I probably didn’t notice if they added depreciation back in or not with #2 son. In the past just opening the letters has made be prostate with grief. I’l have to pay attention this year to the finaid letters since #3 is applying to all profile schools. Even our state flagship is Profile which is unfortunate.</p>
<p>
Yeah, but as we pointed out that’s only true if you would have otherwise had that $500 in a savings account or something. If you would have spent it on groceries then you really don’t have $500 less in assets. You said yourself that schools don’t give a rat’s patootie what you have to spend the money on.</p>
<p>
I guess I am not understanding your point, because this doesn’t make sense to me.</p>
<p>If you have $500 you can spend, and you haven’t spent it by the day you fill out the FA forms, you have $500 in assets to report. It doesn’t matter if it is in your savings account or cash in your pocket.</p>
<p>If you spend the $500 the day before you fill out the forms, whether on groceries or a fridge or paying the plumber or whatever, you have $0 to report.</p>
<p>If you spend the $500 the day after you fill out the forms, you’ve reported $500 in assets on the forms.</p>