We sold a rental house last year and made about 16k in profit after sales expenses. However, the depreciation on the house creates an additional tax burden in the year of sale because capital gains are based on the depreciated value of the property. Thus, our Adjusted Gross Income for this past year will be inflated by almost 40k in capital gains. After we paid capital gains taxes of over 10k, we actually profited by less than 6k. Now I’m worried about a big hit in financial aid. When I run the numbers in a Net Price Calculator, it looks as though we’ll be paying an extra 15-20k next year for college. So when all is said and done, the 16k of profit from the house may actually turn out to be a 10-15k loss because this year’s AGI creates the illusion of 40k in income. Does anyone know how to get around this? Will financial aid offices recognize the issue with “depreciation recapture”?
The income from 2016 won’t be showing up until the 2018/19 FAFSA.
When is your child starting college?
What is the FAFSA EFC based on normal income, without the inflated income from the sale of the house?
Your 2016 income will be used to complete the 2018-2019 fafsa.
Is your student already a student at this college?
Is it a college that meets full need for all? If not…was your need fully met?
If your student is currently in that college, contact them and ask about this financial issue. Maybe (maybe) they will be willing to make a one time adjustment as a special circumstances consideration. Maybe not.
The reality is…you did own a rental property and you did make some money on the sale. Colleges don’t usually provide need based aid to fund private real estate ownership or transactions. But you don’t know if you don’t ask.
I haven’t had that specific issue, but did find writing a letter of explanation on some financial complexity in our situation did help with some schools. I sent it to the FA offices at the sane time as the other FA paperwork.
@intparent what other financial aid paperwork did you “send” to the colleges via mail?
Most colleges have a process for a special circumstances consideration. The OP needs to know what that process is…because that is how most schools deal with this.but really…for this poster…they are looking at an issue for the 2018-2019 school year…and some schools won’t discuss special circumstances considerations a year out.
It looks like this student is considering Rice and UVA. Both are Profile schools. There IS a section on the Profile near the end to put explanations of anything that isn’t otherwise reflected in the form. The OP should plan to do that.
In addition, the financial aid forms should be filed as soon as they become available in October…and the contacts made with the colleges.
@mommdc and @thumper1 Daughter is starting college in the fall. EFC is about 29k this year but, if the numbers on the net price calculator are correct, will go up to 49k next year. Daughter is trying to decide between two colleges, both of which will meet EFC, though one requires more loans.
Yes I did make some money off the property–6k net–and I should pay more for that reason, but my concern is that because of the way EFC is calculated, the 6k in additional income may cost me 20k in college tuition.
@intparent I’ll definitely write a letter to the financial aid office when the time comes. Will call the financial aid offices this week, too, because finances will be a factor in daughter’s decision.
@drgigantor both of your kid’s college choices used the information on the PROFILE to determine your kid’s institutional need based aid. They did NOT use the FAFSA EFC.
So you are talking about the difference onnthe schools’ net price calculators.
Really…the best thing you can do is contact these schools. It may be that they will adjust this for the 2018-2019 school year…but I doubt they will give you that answer now.
In any event…it would be a one year hit…right? Because the following year, that extra income wouldn’t be there.
Call them and ask…and explain that you are trying to make a good decision and finances are a consideration.
It also appears that your daughter is an OOS student at UVA. They do meet full need for all…but I’m not sure how they would consider a special circumstances consideration like this from an OOS student…maybe it doesn’t matter.
Oh…and one last thing…you mention that one school does not have loans. Can your daughter add the $6500 Federally funded Direct Loan for her second year when the time comes? If so, your OOP additional cost would be less.
I’ve heard that CSS schools don’t care about depreciation, but that may not be the case here…don’t know.
[QUOTE=""]
fall. EFC is about 29k this year
[/QUOTE]
are you saying that both UVA and Rice gave you a $29k family contribution? (FAFSA EFC isn’t relevant here).
Did UVA give more loans?
Best to talk it over with the school FIN AID office. they will be able to walk you thru the handling of it. Good luck.
My explanation was longer and more complicated than would fit in the Profile extra space. Maybe some schools would not accept the way I did it. All of my kid’s schools were profile schools, and except for UChicago were LACs.
Also…the net price calculators are NOT accurate when rental properties are taken into consideration. Just FYI.
Thanks for the help, all.
@mom2collegekids UVA would require taking out more loans; Rice’s financial aid is almost all in grants.
If the FAFSA EFC is $29,000 then there will be no federal aid, except loans.
If both are CSS schools, then they base their need based grants on their own EFC calculation, with info from the CSS profile.
You sold the house and made a net profit of $16,000 after commission and seller fees which you can deduct as expenses on your tax return, but the school might not allow all of these deductions when they look at income.
Also you took a deduction on your taxes for depreciation in previous years, that’s why you now have to pay capital gains tax on the recapture of the depreciation. You had a tax benefit in previous years, that resulted in less tax paid.
For your daughter’s first year of college which is 2017/18, the income from 2015 is used. So if you include rental income from the house (if you rented it out in 2015), and value of real estate that isn’t your primary residence, your FAFSA EFC is $29,000? And how much aid did each school offer based on that income and assets?
Then for 2016 you have no rental income, but $16k net income from the sale and $40k in capital gains?
And you no longer have to count the rental house as an asset. And the FAFSA EFC goes up to $49,000?
So now you need to know how much less in aid the schools will offer for the changed income and assets.
And then in 2017 you will have neither rental income from that house, nor net profit or capital gains from the sale, nor the rental house as an asset. So what will the FAFSA EFC be now? And will the schools now offer more aid?
Will all other income and assets be the same for all school years? How much aid does each school offer?
You need to look at all four years and see if both schools are affordable.
That 2017 tax year will be for the 2019-2020 school year. I seriously doubt that colleges are going to give this poster even an estimate of need based aid for two academic years from now.
But the OP could run the NPC without all of this rental stuff and get a very loose guesstimate. However, most net price calculators don’t really ask enough questions to get an accurate read on how rental properties, and the sale of them…and rents affect need based aid. If the NPC doesn’t specifially ask about secondary and rental real estate…and most don’t…it might be a bit inaccurate.
No, they might not, but presumably that will reduce their income in 2017 and 2018, compared to 2016, so they might get more aid, if the school meets need?
Both UVA and Rice meet full need. So, yes…presumably the aid would be adjusted IF the actual overall income goes down.
But really, the 2019-2020 school year is two years from now. How do we, or the OP even know what the actual family income will be for 2017.
But call financial aid at both schools…and ask. Maybe they will have some direction to give you.
I seriously doubt they will ignore the rental depreciation issue. BUT that is my opinion only…so ask the colleges directly. You will get the best info from them.
I ran the net price calculator for Rice.
The 2017/18 COA is listed at $59,950
Then they determine a family contribution.
If the family contribution was $29,000 for you this year, then they calculate need to be $30,950
They meet $25,950 of need with a grant and expect student to contribute $5,000 with work study and subsidized loan.
So the net price this year would be $59,950-$30,950=$34,000
The student can take $5,500 in loans and work in summer and earn maybe $2,500, that’s $8,000.
$3,000 of the COA is estimated book and other misc expenses, which are not billed by the school.
So the parents will need to come up with $31,000 (billed expenses-grant) - $8,000 from student = $23,000
Is that affordable?
Student can earn some money (they have work study of $2,500 in the package) during the semester to cover misc expenses, and books can be rented which should cost less than $1,000.
Then parents will have to consider travel expenses. How does this compare to UVA?
Now if the EFC that Rice calculates goes up to $49,000 for the second year, the grant might go down to $5,950 ($59,590-$49,000) if the same student contribution of $5,000 is expected from Rice.
So the net price now might be $54,000.
And if billed costs are $56,950 and after the $5,950 grant and $9,000 from student ($6,500 loan and $2,500 summer earnings), the parents would have to come up with $42,000.
Would that still be ok?
Of course Rice could expect a larger student contribution than $5,000 in the package to determine the grant and costs will most likely go up too.
<<<<
would require taking out more loans; Rice’s financial aid is almost all in grants
<<<
Then Rice may be best because if your EFC goes up, then DD can take the full Direct Loan amount out to help out…if she has junior standing by then, she can take out 7500
Now for UVA. Their COA and direct billed costs are pretty close to Rice.
And they seem to expect the student to earn $4,000 from work study and $7,000 from loans for a total of $11,000. Which is high. Student can only borrow $5,500 the first year, any Perkins loans would be going away the second year.
And grant aid seems to be going down about $20,000 with the higher income as well.
Rental income in past years was very little after expenses (including real estate taxes and mortgage interest). The house was our previous family home; we didn’t sell it until last year because it was worth less than we could get for it. So as an asset it was worth little to nothing. In retrospect, we might have been better off selling it and taking the loss two years prior. We may end up losing more in the long run by selling it at a profit. If we’d sold at a loss, there would have been no depreciation recapture.
Anyway, I’ve spoken briefly with Rice, and they didn’t provide me with much info. I’ve got a phone appointment with UVA, but they’re not likely to give me any hard numbers. Seems like this situation isn’t all that unusual and must have come up before. I was hoping to discover that both schools had a policy in place.