How Does Selling a Home Impact Financial Aid?
Owning a home doesn't impact you on the FAFSA, but selling a home can result in a nasty surprise: an increase in your Student Aid Index and a resulting decrease in financial aid if the sale occurs during a FAFSA year. How so?
If you have a taxable capital gain from the sale, this will flow through your tax return as capital gain income. You have a reportable capital gain if the sale price exceeds your cost basis (original purchase price plus improvements) by $250,000 if you're a single tax filer or $500,000 if you're married filing joint. For example, if you are married and purchased your home 20 years ago for $200,000, never upgraded the kitchen or did any other improvements, and sell it this year for $850,000, you would have a total gain of $650,000. Your capital gains exclusion would be $500,000 since you're married, so you would have $150,000 of taxable capital gain on this year's tax return. If the sale occurred this year (2024), then that $150,000 would be on the tax return used for the FAFSA for the 2026-27 school year.
Even if you don't have a taxable gain, you might not purchase another home right away. If that's the case, you probably have the money from the home sale stashed away somewhere safe like a savings account or CD. And then that balance gets included with your assets. While assets don't count for a lot in the FAFSA formula-- 5.64% of their value at most-- even a small percent of a large number can have a big impact on your SAI. Every $1,000 only adds $56 to your SAI, which means that every $100,000 adds $5,640.
The worst part about this is, typically families with high school-aged students-- families in the FAFSA income years-- only sell their house because something else difficult has happened: divorce, loss of a spouse, job loss. Increasing your SAI during such a time is a significant added burden. (Of course, there are plenty of families who downsize when their youngest goes off to college, in which case the asset piece of the equation is more likely to apply.)
The good news? A home sale is a one-time event that can be part of a financial aid appeal. The bad news is that if you have either the income or the asset on your first year FAFSA, you'll need to appeal to each school you've applied to.
In this video, I spoke with Evan Swanson of Guild Mortgage about how selling a home can impact a family's eligibility for financial aid and scholarships. If you're thinking of selling, give it a listen!
