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Professional Judgment
 
Rental Property and Multi-Family Residences

The Federal need analysis methodology ignores the net market value of the family's primary residence. Sometimes, however, the family's primary residence is a multi-family dwelling. For example, the family might own a duplex, living in one half and renting out the other.

For multi-family homes and apartment buildings where the owner occupies a unit, the portion not occupied by the owner is treated as an investment asset. Only the units occupied by the family are considered to be the family's primary residence.

If the property is not deeded separately, the value of the primary residence versus the investment property can be divided using any of the following methods:

  • Number of units occupied by the owner versus the number of units occupied by the tenants.
  • Square footage occupied by the owner versus the square footage occupied by the tenants.
  • Number of bedrooms in each unit.
  • Prorated according to the fair rental value of each unit.

This allows one to apportion an estimate of the fair market value of the building. For example, in a case involving a duplex, the net market value should be divided evenly.

Net market value may be obtained by using real estate listings (from the local newspaper or multiple listing service or property tax assessment site) to get a ballpark figure for similar size properties in the same location. There are also web sites like HomeRadar, Zillow and Domania that provide ballpark estimates. Another method involves using the Federal Housing Index Calculator to calculate the minimum derived value for the property based on its original purchase price. This yields a conservative lower bound on the value of the property.

If the property is deeded separately (e.g., townhouses or condominiums), it should be easier to assign a separate value to the parts of the property occupied by the owner.

Financial aid administrators should compare the mortgage interest reported on Schedule E with the amount reported on Schedule A as a sanity check. Financial aid administrators should also see if the parents checked Yes on line 2 of schedule E, as this might allow the financial aid administrator to make adjustments in their favor.

If the family does not own 100% of the property, the financial aid administrator should make adjustments accordingly.

If the family rents out a room in their home, it is still considered part of the family's primary residence, unless it has a separate mailing address (i.e., a separate outside entrance).

The key distinction is whether the rental property is considered part of the family's primary residence or not. If it is part of the family's primary residence, it is not reported as an asset. If it is separate from the family's primary residence, it is reported as an asset. Determining whether a rental property is separate is often a judgment call, but any of the following are good signs that a rental property should be reported as an asset on the FAFSA:

  • Deeded separately from the primary residence.
  • Separate outside or keyed entrance from the primary residence.
  • Separate kitchen, bedroom and bathroom from the primary residence.
  • Separate structure distinct from the primary residence.
  • Separate delivery or USPS address from the primary residence.
  • The rental property does not share utility meters for electricity, water or gas with the primary residence.
  • Separate landlord insurance policy for the rental property.
  • Deduction on IRS Form 1040 Schedule E for mortgage interest (line 12), real estate taxes (line 16) or depreciation (line 20).
  • The number of unrelated tenants plus the family exceeds local ordinance limits for a single property (i.e., 3 to 5, depending on municipality).
  • Identified as a separate plot on the local tax maps.

See also the discussion of Rental Property in the page concerning the small business exclusion.

 

 
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