4 Guidelines for Claiming a Rental Property as a Business on the FAFSA

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

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

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 that much easier.

1. Get organized 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 must 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, or if you have a vacation cabin on a lake that you maybe rent once or twice during the season; don’t expect that to be considered a business asset. The more activity you have in real estate, the better. Must be able to demonstrate substantial levels of participation and material activity. If you have several properties and an active participation in their management, 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 displayed in your business may also indicate more business activity, rather than just rentals:

  • Develop or rebuild
  • Build or rebuild
  • Acquire
  • Converts
  • Operate or manage
  • Corridors
  • Other business activity associated with the property

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

  • Register for the appropriate state and local permits
  • An employer identification number (EIN)
  • Fictitious name or DBA registration for the company
  • 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 allow you to keep the exclusion, others will not. My recommendation is, when in doubt, to list the property as a business. Get the school to take the initiative to prove otherwise.

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