4 Guidelines for Claiming Rental Property as a Business on FAFSA

Rental property on the FAFSA has always been a controversial area in my mind. The way these assets are listed on the FAFSA can mean the difference of thousands of dollars in financial aid. It freezes me that the government tells you what it is and is not a commercial enterprise that is making money. The 2009-10 FAFSA Application and Verification Guide states the following …

Sometimes a student or parent will claim the rental property as a business. Generally, however, it must be reported as immovable. A rental property would have to be part of a formally recognized business to be reported as such and would usually provide additional services such as regular cleaning, linen, or housekeeping.

If possible, you would like to claim real estate as a small business and then qualify for the small business exemption on the FAFSA form. Here are some guidelines to follow that make it much easier to claim real estate as a business.

1. Organize under a separate legal entity – Do not hold rental property 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 corporate asset.

2. The larger the business, the better – If you only have a piece of property that you rent, or if you have a vacation home on a lake that you may rent once or twice during the season; don’t expect it to be considered a corporate asset. The more real estate business you have, the better. You must be able to demonstrate substantial levels of participation and material activity. If you have multiple properties and active participation in their management, you will strengthen your case. This is an area where going big and acquiring more resources will help you.

3. Show Associated Business – The following businesses shown in your business can also indicate multiple businesses, rather than just rentals:

  • Develop or retrain
  • Build or rebuild
  • acquires
  • Converts
  • Operate or manage
  • Broker
  • Other commercial activities related to the property

4. Other Activities – There are other signs or activities that will add weight to the listing of real estate as a business operation:

  • Registration for appropriate state and local permits
  • An employer identification number (EIN)
  • Fictitious name registration or DBA for the company
  • Separate company current account

These four guidelines will definitely strengthen your hand in getting small business exclusion from the FAFSA form. But it’s not a black and white standard. Some schools will allow you to keep the exclusion, others will not. My recommendation is to list the property as a business when in doubt. Get the school to take the lead in proving otherwise.

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