Qualifying for a Mortgage with Small Business Tax Deductions

Buying & Selling Real Estate
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Qualifying for a Mortgage with Small Business Tax Deductions

Mark S.
Plano, TX · Member since 2014 · 197 posts · 33 votes

Hi,

I am a rather new investor with two duplexes in the DFW area. I also have a small photography business which helps reduce my personal taxable income.

The question I have is do I have to be careful about how many expenses I use as deductions to qualify for a new mortgage next year. My lender has told me that I need to show I can pay for 25% of the mortgage for new properties for next year. However, with the amount of money I am spending to get this new business going it greatly reduces my income after deductions and I am worried I may deduct too much so I cannot qualify...


So an example of this is our investment property income. We will make a profit on these this year but next year when we file our tax return we will most likely show no profit due to depreciation. What will the lender look at? The profit before or after depreciation?

Also I got a new job which has a healthy raise. I have a side business which is showing a loss. On our tax return we will show less taxable income after these losses from our side business. Will this keep us from getting a loan on our next property?

Just trying to see how all of this works so we can do what's best for all of our businesses.

Thanks for your help

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  • Joseph ZanazanBusiness Member
    Lender · Los Angeles, CA · Member since 2014 · 64 posts · 50 votes
    12y

    Think of your deductions as expenses you must pay for in order to survive except you're paying them with pretax dollars. Thus securing a larger net amount for yourself because you're doing your best to keep that figure uncompromised. That net amount you've already done your best to secure is the amount the underwriters will allow you to use to your advantage. What we try to do and can't seem to get away with is use the pretax figure because its naturally larger and works out better for us. The bank however will undoubtedly want to see exactly how many of your expenses have already been written off by reviewing your 4506 transcripts. After subtracting the portion we have already written off from our gross income, we are left with our true net amount called the "adjusted" income. The underwriter will always take the conservative approach because thats what they are there to do. Deductions all work the same way and you're absolutely correct to assume that your tax deductibility practices impact your qualification eligibility. 

    Each real life scenario you just named has its own respectable tax filing category. The IRS must know what the current overall financial outlook of your earnings is. Form 1040 will give us the entire grid as a snapshot. The schedules will individually define what the profits and losses look like. The reason why usually two years of consistency is needed with these numbers is because statistically one year just doesn't seem to be provide enough stability. Things are obviously a lot more likely to change after a year than two years and it seems that extra year is what Fannie/Freddie/Ginnie require as a minimum with a likelihood of continuance.

    Whether or not these guidelines will keep you from qualifying will remain to be answered once the actual application is taken, credit is pulled and income is calculated. You know the numbers, we don't. General information can be a great method education but knowing what your actual figures are and whether or not you qualify can be priceless. Im licensed in the wonderful state of Texas. I would be more than happy to run some numbers with you free of cost of course and help address any uncertainties you might have about the financing process. Cheers.

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