Rental property on the FAFSA has always been an area of contention in my mind. How these assets are listed on the FAFSA can mean the difference of thousands of dollars in financial aid. For the government to tell you what is and is not a commercial enterprise that is making money leaves me cold. Tea 2009-10 FAFSA Application and Verification Guide states the following…
Sometimes a student or parent will claim the rental property as a business. It should generally 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 would typically provide additional services such as regular cleaning, linen, or maid service.
If possible, you want to claim real estate as a small business and therefore qualify for the small business exemption on the FAFSA form. Here are some guidelines to follow that make claiming real estate as a business much easier.
1. Organize under a separate legal entity – don’t own rental properties directly in your name and expect them to fly with a financial aid officer. They should always be organized under a C-corp, S-corp, LLC, or similar entity. This is by far the most important qualification to be considered a business asset.
2. The more activity the better: If you only have one property that you rent out, or you have a vacation cottage on a lake that you maybe rent out once or twice during a season; don’t expect that to be considered a business asset. The more activity you have in real estate, the better. You must be able to demonstrate substantial levels of involvement and material activity. If you have multiple properties and are actively involved in managing them, you will strengthen your case. This is an area where going big and acquiring more assets will help you.
3. Show Associated Activity – The following activities shown in your corporation may also indicate more business activity, rather than just rentals:
- Build or remodel
- Build or rebuild
- Operate or Manage
- Other business activity associated with the property
4. Other activities: there are other signs or activities that will add weight to the inclusion of real estate as a commercial operation:
- Registration for applicable state and local permits
- An employer identification number (EIN)
- Registering a fictitious name or DBA for the business
- Separate business checking account
These four guidelines will definitely strengthen your hand in getting the small business exclusion on the FAFSA form. But it is not a black and white standard. Some schools will allow you to keep the exclusion, others will not. My recommendation is when in doubt, list the property as a business. Have the school take the initiative to prove otherwise.