Impact on Aid eligibility
This can affect eligibility for need-based financial aid in two ways:
There are two practical solutions to this problem. One solution is to realize any capital gains at least two tax years prior to filing the FAFSA. For example, the parents of a college-bound child should realize any capital gains no later than the fall of the child's junior year in high school, before the start of the base year. The other solution is to balance capital gains with losses in order to avoid artificially inflating income. There is also an exception when capital gains are realized as the result of "a sale of farm or business assets of a family if such sale results from a voluntary or involuntary foreclosure, forfeiture, or bankruptcy or an involuntary liquidation." Section 479A(b)(1) of the Higher Education Act of 1965 gives college financial aid administrators the authority to exclude the proceeds of such a sale from income. However, college financial aid administrators are unlikely to grant an adjustment to income for capital gains in other situations.