Do I need to list an asset that lost value on the FAFSA?

Question:

One of my investments has lost value. I bought a rental property at the height of the housing market, and it is now worth about half of what I paid. If I were to sell it, the proceeds would pay off the mortgage because of the equity in the house. Do I need to list it as an asset on the FAFSA?

Answer:

Investment real estate is always reported as an asset on the FAFSA (Free Application for Federal Student Aid) and the CSS/Financial Aid PROFILE form. The asset value should be reported as the net worth, which is the difference between the current market value of the asset and any debts secured by the asset. The PROFILE form also asks for the year of purchase and the purchase price.

For example, suppose a rental property was purchased several years ago for $150,000 with a mortgage for $120,000 and a $30,000 down payment. Due to the economic downturn, the property is now worth $100,000, representing a $50,000 decrease in value. In the meantime, payments on the mortgage have reduced the amount owed to $75,000. As a result, the net worth of the property is $25,000, the difference between the current market value ($100,000) and the remaining mortgage balance ($75,000). If the property were to be sold, this is the net proceeds of the sale after the mortgage is satisfied. The owner would report $25,000 as the net asset value on the FAFSA, not the $50,000 loss, the $150,000 original purchase price or the $100,000 current market value.

Note that the mortgage must be secured by the real estate to offset the market value of the real estate. Sometimes families use a home equity loan on their principal place of residence to buy a second home. This mortgage is secured by the principal place of residence and offsets the net worth of that property, not the net worth of the second home. But, since the net worth of the principal place of residence is not reported as an asset on the FAFSA, the family gets no benefit from having a mortgage on this property. For the mortgage to reduce the net worth of the second home, it must be secured by the second home.

This may not seem fair, but the FAFSA tries to determine the cash equivalent or exchange value of each property if it were sold. If the mortgage is not secured by the investment real estate, there is no requirement that the family pay off the mortgage when the investment real estate is sold.