Rental income
If you have a small business that is both owned and controlled by your family and has fewer than 100 full-time (or full-time equivalent) employees, it is not a reportable asset. However, income from a rental property cannot be included as a small business.
"Rental properties are a popular tax and investment strategy among parents, but they do not qualify as a family controlled small business asset that can be excluded from the FAFSA," said Forbes. "Don't make the mistake of thinking that you can just throw your rental properties in an LLC and exclude the value as a small business on the FAFSA."
Real estate can be reported as an asset on the FAFSA as either investment real estate or business/farm assets. "For real estate to be considered a business asset, it must be used in the operation of the business, not incidental to it," said Fastweb. "Sub-regulatory guidance published by the US Department of Education indicates that, ‘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. This is similar to IRS guidance concerning whether rental income from real estate must be reported on Schedule E or Schedule C of IRS Form 1040.'"
If you're unsure of whether to report rental income as a business asset or investment asset, there are some rules of thumb that you can read about here, but the best course of action is to consult with your accountant or tax attorney. Keep in mind, though, that reporting real estate as a business or farm asset has "less of an impact on the student's expected family contribution (EFC) than investment assets."
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