mcb39 Posted April 25, 2007 Report Share Posted April 25, 2007 Mid to Low Income SE clients have 5 Rental properties as well as a Taxidermy Business and a Laser Business. They have been denied FASFA Student Loans for their daughter based on the Rental Properties being considered as Assets. FASFA contact tells them that if the Rentals were on a Schedule C as a business, they would not be counted against them to qualify for Financial Aid. How do we create a business out of these Rentals before same issue arises next year.? Is it necessary to create an LLC to contain the Rentals; file a 1065 and thereby move all of the Rental Activity to Partnership Income.; or is there an easier way? This one has me totally stumped. Home is not an asset; businesses are not assets; but Rental Properties are. Theirs is probably one of the most complicated Returns that I do each year and I hate to make it more complicated. They are a young, hard-working married couple with 2 daughters and are depending on me to "fix" this for them. Any advice out there? Quote Link to comment Share on other sites More sharing options...
OldJack Posted April 25, 2007 Report Share Posted April 25, 2007 Why would you want to make the rental property income and gain on sale subject to self-employment tax simple to obtain a student loan? The type of entity would make no difference, only making the taxpayer a real estate dealer would put the assets on 1040 Sch-C as a trade or business. There are times when not doing something for a client makes sense. Quote Link to comment Share on other sites More sharing options...
D Eckerman Posted April 25, 2007 Report Share Posted April 25, 2007 Possibly an LLC might help - a single member treated on just sch E's would not as that would show the same as his return now. Don't they ask assets vs liabilities? My rental people all have loans against and therefore there isn't any asset against the FAFSA. However, if he has equity maybe he should leverage that for school costs and pay rather than the government supporting his child... Quote Link to comment Share on other sites More sharing options...
mcb39 Posted April 25, 2007 Author Report Share Posted April 25, 2007 Possibly an LLC might help - a single member treated on just sch E's would not as that would show the same as his return now. Don't they ask assets vs liabilities? My rental people all have loans against and therefore there isn't any asset against the FAFSA. However, if he has equity maybe he should leverage that for school costs and pay rather than the government supporting his child... De....maybe you have to explain FASFA to me. How are student loans the 'government supporting your child"? I have never been in this position personally but have plenty of clients who scramble to "do the paperwork" every year. Also, have many more capable of paying themselves than this couple. I don't know about the assets vs liabilities; but no, they don't have a lot of debt against these rentals because the equity has been used to improve and enlarge the Taxidermy business. The Rental income is pretty much what they live on. The U of Minn qualified them; the U of W won't! Old Jack....I have used that arguement with them. I don't see the sense myself. I think rentals are a wonderful tax vehicle and one of the reasons is just what you cite..the fact that you don't pay SE tax on the income. I didn't say I agreed with the clients; but just asked how I could address what they want me to do for them. Mom said, "I don't have anything going into SS now, so I will take the Rentals, even tho I suggested that she split the Taxid with Dad. If she understood the inanity of that statement, she would be doing her own tax returns. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted April 25, 2007 Report Share Posted April 25, 2007 The government pays the interest during the deferral period; that is how student loans are government support. If the loans are against the rentals, that would lower their equity, and thus their availability as assets that can be used to support the child. If they traced the income to the taxidermy business and are deducting the interest there, thereby lowering SE tax they have been paying, they are looking to benefit from both, basically turning SE income (taxidermy biz) to non SE income (rental). Now the strategy is showing one of its drawbacks. Kinda like, you can't have it both ways. Quote Link to comment Share on other sites More sharing options...
mcb39 Posted April 26, 2007 Author Report Share Posted April 26, 2007 Thanks for all the input. We all pretty much agree here. I just wondered if (again) I was missing something. In actuality, this wasn't a strategic thing on their part. They were totally stunned when their application was turned down. The County had taken a strip of their frontage to widen the highway and they had a quite large payout. CG was reported in 2006. I believe that their banker advised (compelled) them to apply the money to the rental mortgages rather than the mortgage on their homestead property which also houses the taxidermy building. I have printed all of your replies and will let her read them so that she can, hopefully, see the corner they have backed themselves into. Thanks again. Quote Link to comment Share on other sites More sharing options...
OldJack Posted April 26, 2007 Report Share Posted April 26, 2007 You can't just ignore a tax status such as rental property to report on Sch-E, however, if you really want to make it a Sch-C business it is possible by providing significant "services" with the rental activity. That would be services such as trash pickup, maid service, etc. Significant services makes it a business activity taxable on Sch-C. Frankly... I think it is a dumb idea that you would probably have to continue and pay that 15% self-employment tax on the profits. If you suddenly dropped the services and went back to Sch-E shortly after the loan or education you could be accused of fraud or something. Quote Link to comment Share on other sites More sharing options...
Burke Posted April 26, 2007 Report Share Posted April 26, 2007 Mid to Low Income SE clients have 5 Rental properties as well as a Taxidermy Business and a Laser Business. They have been denied FASFA Student Loans for their daughter based on the Rental Properties being considered as Assets. FASFA contact tells them that if the Rentals were on a Schedule C as a business, they would not be counted against them to qualify for Financial Aid. How do we create a business out of these Rentals before same issue arises next year.? Is it necessary to create an LLC to contain the Rentals; file a 1065 and thereby move all of the Rental Activity to Partnership Income.; or is there an easier way?You can form an LLC or a Sub-S corp for these properties which simply removes them to another tax return, and the income flows through to the TP via K-1's. It is still passive income (Form 8835) but whether this would make any difference on the FAFSA or not, I cannot tell you. It would just go on Page 2 of Sche E instead of Page 1. But it would only be one figure and not a rental schedule. Quote Link to comment Share on other sites More sharing options...
mcb39 Posted April 27, 2007 Author Report Share Posted April 27, 2007 Thanks G Sawyer; you are the first poster to suggest that it would still be passive income.....will investigate that avenue. Quote Link to comment Share on other sites More sharing options...
TAXBILLY Posted April 29, 2007 Report Share Posted April 29, 2007 Agree with G Sawyer ... passive is passive. taxbilly Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.