Monday, August 29, 2011

4 Guidelines For Claiming Rental Property As a Business on the FAFSA

Rental Property on the FAFSA has always been an area of contention in my mind.  The manner 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 business enterprise that is making money kind of frosts me.  The 2009-10 FAFSA Application and Verification Guide states the following...

enterprise rental car

At times a student or parent will claim rental property as a business.  Generally, it must 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 it usually would provide additional services like regular cleaning, linen, or maid service.

ENTERPRISE RENTAL

If at all 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 a few guidelines to follow which make claiming real estate as a business much easier.

1.  Organize under a separate legal entity - Don't hold 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 just have one piece of property that you rent out, or if you have a vacation cottage on a lake that maybe you rent 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 need to be able to demonstrate substantial levels of material participation and activity.  If you have multiple properties and active participation in managing them, it will strengthen your case.  This is one area where going big and acquiring more assets will help you.

3.  Show associated activity - The following activities showing in your corporation may also indicate more business activity, rather than just rentals:

Develops or redevelops Constructs or reconstructs Acquires Converts Operates or Manages Brokers Other business activity associated with the property

4.  Other activities - There are other signs or activities which will add weight to listing real estate as a business operation:

Registering for appropriate state and local permits An employer identification number (EIN) Fictitious name registration or DBA for the business Separate business checking account

These four guidelines will definitely strengthen your hand in getting that small business exclusion on the FAFSA form.  But it is not a black and white standard.  Some schools will let you keep the exclusion, others will not.  My recommendation is when in doubt, list the property as a business.  Make the school take the initiative to prove it otherwise.

4 Guidelines For Claiming Rental Property As a Business on the FAFSA

http://www.realcollegesavings.com provides more information on the college funding and selection process. Download the free report "The 14 Great Myths to Paying for College" while you are there.

From Scott Anderson - President of College Financial Strategies and Real College Savings

ENTERPRISE RENTAL

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