When is Real Estate Reported as a Business Asset on the FAFSA?
September 03, 2012
Impact of Business Assets on Financial Aid
Families prefer to report real estate as a business or farm asset because these assets have less of an impact on the student’s expected family contribution (EFC) than investment assets. Certain types of business assets are excluded from the FAFSA, and reportable business assets are adjusted to protect part of the net worth from need analysis.
The small business exclusion allows the applicant to omit the net worth of a small business from the FAFSA. A small business has 100 full-time or full-time equivalent employees and is owned and controlled by the family. More than 50% of the business must be owned by people who are directly related by birth or marriage. (The family members who own the business do not have to all be counted in the household size on the FAFSA to qualify for the small business exclusion.)
If real estate is reported as a business asset on the FAFSA, the federal need analysis formula partially shelters the net worth of the asset by reducing its value according to a bracketed scale. The first several hundred thousand dollars of the net worth is reduced by 40 to 60 percent.
The net worth of a business is calculated by subtracting any debt secured by the business from the current market value of the business. If the business was not used as collateral on the loan, the debt is not subtracted from the value of the business. For example, if family used a home equity loan on their home to fund the business, the debt is not subtracted from the value of the business because the loan is secured by the family home and not the business. Similarly, credit card debt on a personal credit card does not reduce the net worth of the business.