rental property real estate agent as small business owner

<p>my husband is a real estate agent who actively rents, repairs, and manages 10 rental properties as part of his business...does anyone have any experience on how to have this considered as a "small business exception" on the FAFSA? We declare income from rental properties on Schedule E and the FAFSA rules say that if you do you must list equity as investment which would kill us for financial aid eligibility, yet he can't sell the properties because they are 50% of his business...any experience out there with this?</p>

<p>Sorry to say it, but you are basically screwed.</p>

<p>I am in this situation as well, and there isn’t a lot you can do. Be very aggressive when calculating the values, rental properties have taken a beating in the RE crash, so make sure you don’t over-value them.</p>

<p>There is speculation that if you created a business entity such as an LLC or S-corp, transferred the properties to that business, then you might be able to get away with claiming it as a business. No one here has reported doing this, and no one knows if it would stand up if your tax forms were requested for verification.</p>

<p>Most small landlords don’t do this because 1) it is a hassle to transfer the properties because the mortgages become callable when the ownership is transferred, and dealing with the banks for this is a royal PITA; 2) if you buy properties within the business, it can limit the mortgages you can get or make them more expensive; 3) there’s no real legal protection to be gained, because as the hands-on management you would still be liable; 4) there are significant costs tax-wise - tax preparation becomes more complicated and therefore more expensive, and many states (like mine) have minimum fees of around $500/year for a company - if you put each property in a separate company this adds up in a hurry; 5) it may re-characterize the income, such that you will have to pay SE tax on the profits, or will be unable to use the rental loss deduction, or may lose the unlimited rental loss deduction available to RE professionals like your H (assuming he meets the work and material participation requirements).</p>

<p>And BTW the FAFSA does not give credit for the employer portion of SE tax, so you not only get to pay the tax but then you have less money to pay your EFC too.</p>

<p>And - if you have to fill out the CSS Profile, they will count the assets anyway.</p>

<p>And in the final analysis it probably won’t matter that much anyway, because there are no schools that meet full need based on FAFSA. So even you shave 10 or 15K off your EFC by moving the pieces around and dealing with the tax issues, there’s a good chance you won’t get any more money!</p>

<p>Yeah, we’re in a similar situation. Fortunately, S will either go to one of the schools where he got merit aid, or to a State school where the cost is about the same as private-minus-merit.</p>

<p>Rental properties are not considered “small business”
Sorry.</p>

<p>I agree. I have a good friend in the same situation and his kid did not get a dime from Harvard fro that reason. That the properties were also his retirement base made no difference.</p>

<p>Look at it this way - the tax code doesn’t consider rentals to be a business, otherwise you would be filling out schedule C instead of schedule E. So it makes sense that FAFSA treats it the same.</p>

<p>And for most people there are significant tax advantages for rentals to not be treated as a business.</p>

<p>Finaid.org, in the section on “Maximizing Your Aid Eligibility” says the following about putting RE into a corp:</p>

<p>

</p>

<p>[FinAid</a> | Financial Aid Applications | Maximizing Your Aid Eligibility](<a href=“http://www.finaid.org/fafsa/maximize.phtml]FinAid”>http://www.finaid.org/fafsa/maximize.phtml)</p>