<p>The IM would probably include the value of the first house whereas the FM excludes the value of the primary residence. </p>
<p>Swimcatsmom, is it impossible for a family to get a zero EFC with a $40K income? Perhaps the $40K figure is not the AGI.</p>
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<blockquote> <p>Doing that (without the second house):</p> </blockquote>
<br>
<p>Gives me a FM of $0
and a IM of $13668.>></p>
<p>Why are you doing this WITHOUT the second house?</p>
<p>Also, for the IM...do you own the house in which you reside? If so, the IM takes into account the equity in that house.</p>
<p>I don't understand something....how did a family with an income of $40,000 meet the eligibility for a mortgage for a second home valued at $400,000? It sounds like there are some other assets somewhere. The down payment for second homes is typically higher than for first homes.</p>
<p>While you may be able to say that the value of the second house is 0, you still have to report the rent received from the tenants as income for financial aid purposes. </p>
<p>Everyone who becomes a real estate owner and landlord does it "for the extra income." Your parents are no different than anyone else; there is no "dilemma."</p>
<p>And the Institutional Methodology often gives different results than FAFSA. Schools using IM are allowed to do whatever they want with the data they get; they can slice and dice it anyway they choose. It is not unusual for IM to come up with a higher EFC than FAFSA.</p>
<p>Could have been a private deal. Also the second home is income producing and could be making well enough to pay the mortgage. Doesn't really matter. They have the second house, so you are right, Thumper, that it doesn't make sense that the OP is doing the calcs with just one house. I think Op is looking at the impact of that second house.</p>
<p>Ok, OP. Pretty much established that an income producing second house is going to jack up the EFC. However, it also jacks up the income for the family and yields an asset that may increase in value. As a rental home, it may still appreciate in value despite the housing slow down as such slow downs produce an increased demand for rentals. So although in the short term, your financial aid is affected, your parents may well do better in the long term owning this property. </p>
<p>It is fraud to try to hide the ownership, not to mention risky doing sneaky stuff like shell transfers and transfering ownerships, since if some things happen during the other person's ownership, your parents are going to have big problems and could very easily lose the house. They have a house, they have the income from the house. I assume with their income level, they need that income from the house. College aid is not the end all in the total financial picture. You are going to have to buck up and either your parents or you are going to have to borrow the additional funds. It may well be the best investment decision in the end. It is not considered the best investment move to divest oneself totally of income and assets just on the chance of getting financial aid. Just because you have need figures, by the way, does not mean a school is going to meet that need. Gapping is rampant.</p>
<p>
[quote]
Swimcatsmom, is it impossible for a family to get a zero EFC with a $40K income? Perhaps the $40K figure is not the AGI
[/quote]
</p>
<p>No not impossible. You are right the automatic 0 EFC and simplified needs are driven by a combination the AGI (not just earned income) and meeting the other requirements (1040a or 1040ez/or receiving certain means tested benefits). For the 2008-2009 school year the AGI cap is <$20k but it is increasing to <$30k for the 2009-2010. If the AGI is <$20k (<$30k ) and there is additional untaxed income it is possible to qualify as long as the 1040a or 1040ez/or benefits eligibility is there. Based on what the OP has said I would expect them to not be eligible for the 1040a or ez based on the rental income (I am 99% pretty sure rental income has to be reported on a 1040 but I am not a tax expert). However there may be parts of the picture I am missing.</p>
<p>I don't *think *the tax return requirement is changing for next year for simplified needs or automatic 0 but would not swear to it. I don't know that any of the EFC calculators have been updated yet to reflect the 2009-2010 rules. I know the finaid one has not.</p>
<p>Yeah. If you say that it's between $20-$30k for a $0 EFC then we must be doing something wrong. As I said, we'll do it again this afternoon when my dad returns from work. However, I'm pretty sure I'm doing it right.</p>
<p>Is the second house asset the current price of the home minus the mortgage owed PLUS the amount earned from rent?</p>
<p>Also:</p>
<p>
[quote]
Is the second house asset the current price of the home minus the mortgage owed PLUS the amount earned from rent?
[/quote]
</p>
<p>No. The **asset **value is the current value of the house minus the mortgage.</p>
<p>The amount earned from rent is income. The rental income s/b reported on the tax returns and should therefore be part of the AGI (adjusted gross income).</p>
<p>Income and assets are 2 separate things and are reported separately on FAFSA and are treated differently by the EFC formula.</p>
<p>The problem comes down to the rent. The rent is income and income is assessed very heavily, especially the marginal rates. Assets have an exclusion and even then are only assessed 5.6%. The rental income is what is likely bringing things up there.</p>
<p>The net value of the 2nd house is its current market value minus the mortgage minus any reasonable costs that would be incurred if it were sold (6% of the total cost to the real estate agent, costs to fix up the house, etc). The rental income has nothing to do with the net value of the house.</p>
<p>On the tax form it says the amount from the second home is -$20,000. And that number was subtracted from my parents salaries for the AGI.</p>
<p>Huh? The rental income is a negative number?</p>
<p>UH??? This makes no sense....the rental income from the house is minus $20K? How could that be? Did they do a TON of work on this house this year? Did their expenses really exceed the rent by THAT much? That is$1670 a month in the hole and that is a huge red flag. How can someone with a very low income afford to be taking that kind of loss. Something isn't right.</p>
<p>I would suggest that you find someone knowledgeable about completing the financial aid calculators and tax forms and sit with THEM to make sure you are entering the correct data on both. It sounds like the rental property income needs to be accurately reported (yes, you can have a loss, but if <em>I</em> had THAT much of a loss, I would be selling the property or raising the rent).</p>
<p>Looking at schedule E it reports rental income and any expenses related to the property (mortgage, expenses etc). But that is a heck of a loss? If your parents are using schedule E you must file a 1040 so cannot be eligible for the automatic 0 EFC or simplified needs test. But if they are incurring that much of a loss maybe it is driving the income low enough to where the income is all protected by the income allowances? Your situation sounds complicated to say the least.</p>
<p>While in most cases, I wouldn't suggest selling an investment to pay for college, I might do so in the case of this OP...IF the information posted is accurate. If the family is losing $20K per year on this rental, that same $20,000 could be used to fund the student's college education. Sell the house...it sounds like it's bleeding this family dry. If the value is really $400,000, even with a down payment (where did that come from), the mortgage payments must be quite high, and you have to add property taxes and maintenance to that. Yes there is depreciation on rental properties, but not to this extent.</p>
<p>This could be one of those "choices"...fund college or fund the rental property. I would not pretend to advise the family which choice to make, but there it is.</p>
<p>I have to wonder on which "tax form" is there a -$20K.</p>
<p>When you have a rental property don't you get to depreciate the property? In my experience most people who have rentals make plenty of cash, but not necessarily a lot of "taxable" income because of the deductions that are allowed.</p>
<p>bulinski, yes you do get to depreciate the property...and you do take deductions for things like maintenance and repairs, and other expenses. BUT to LOSE $20,000 in one year, is quite a LOT...a lot. And especially for a lower income family. </p>
<p>We owned a rental property many years ago (a former primary residence that we rented for about 5 years)....and even with the depreciation, we never took much of a loss...we sought to break even or even make a little to cover some of the expenses. </p>
<p>If I were losing $1600 a month on an rental income, I would sell it...but that is what <em>I</em> would do. Of course, if there were something that showed me that over time, I was going to recoup my losses, that would be something else.</p>
<p>But this family is struggling with the expenses of this rental property AND the prospects of funding a college education. </p>
<p>It appears almost that they are trying to figure out a way NOT to have this rental property count as an asset and/or income producing item so that their financial aid will be maximized. I'm just not sure that is possible.</p>
<p>While expenses, depreciation, etc. may be allowed under the tax code, they are often not allowed for purposes of financial aid. These deductions are added back into the value of the asset. For more explanation, search for curmudgeon's posts about how his business (ranch) is treated for FA.</p>
<p>Depreciation is often added back by finaid officers, whether it be a rental home or a business deduction.</p>
<p>If the house is worth less than the mortgage and costs to sell then it is $0 asset . If the rental income is negative, that too is not affecting EFC. The depreciation will likely be added back to income.</p>
<p>It is quite possible the OP is entering the total market value not the net market value of the house and is simply making an error on filling out FAFSA. If this is the case, $0 net value, then the house does not affect finaid.</p>
<p>Of course the wisdom of the decision to keep or sell it is another discussion. If the <$20k> is mostly depreciation and it reduces the AGI it could be a decent investment??</p>
<p>OP needs to sit down with someone and go over the FAFSA and the parents' return. It is not unusual for rental income to be negative the first year a house is purchased. There are a number of things that can be set against the income and the depreciation. If that is the case, and the rental property is mortgaged, it is hard to see how it is upping the EFC. I do not know enough about how rentals are treated, whether the expenses and depreciation are added back into the income for FAFSA purposes to even begin giving any advice other than to find someone who knows and get some help.</p>