Reducing Taxable Income - Shooting Myself in the Foot for a Loan?

[Mindy Jensen]

I want to reduce my taxable income as much as possible. (Selling stocks and want to avoid long-term capital gains.)

Maxing out the 401k is $18,500, standard deduction is $24,000. 

My question is, what does the bank look at when deciding to give me a mortgage? Am I shooting myself in the foot when I'm applying for a mortgage (primary residence, I live-in flip) by reducing taxable income this year? Or do they look at gross income? (It's been a while since I got a mortgage and things have changed.)

Asking here so others can benefit from the answers. @Chris Mason ? 

[Chris Mason]

Originally posted by @Mindy Jensen:

I want to reduce my taxable income as much as possible. (Selling stocks and want to avoid long-term capital gains.)

Maxing out the 401k is $18,500, standard deduction is $24,000. 

My question is, what does the bank look at when deciding to give me a mortgage? Am I shooting myself in the foot when I'm applying for a mortgage (primary residence, I live-in flip) by reducing taxable income this year? Or do they look at gross income? (It's been a while since I got a mortgage and things have changed.)

Asking here so others can benefit from the answers. @Chris Mason ? 

 For self employment income, Fannie/Freddie/Jumbo/etc are MOSTLY the same. For a sneak preview, clicky click. I'm assuming you have one or more side gigs other than working for BP. 

401k contributions will not impact you either way. Same with health insurance. It turns out that Fannie Mae doesn't want people cancelling their 401k contributions and downgrading their health insurance to qualify for a mortgage, which is why we generally use gross income, not net, for W2 hourly/salary type work. 

Your W2 base salary working for BiggerPockets.com should/will be counted at 100% of value day 1, without waiting on two years of tax returns. So if you get a pay raise tomorrow (@Brandon Turner ) you will not have to wait for it to be reflected on tax returns to count. 

Commission, bonuses, the LLC AirBnB property management business you have, your real estate agent work on Schedule C, royalties from your books, etc - for that slice of your income, it'll be based on tax returns. Not everything you write off will 'hurt' your income calculation, many things can be 'added back,' which you can see at the link above. Specific to you as a real estate agent, track all miles you drive showing homes and write that off in Sch C P2 box 44A (yes I have that memorized) to the greatest extent your CPA tells you it's lawful to do -- this is one of those magic write-offs that minimizes your tax burden while having zero impact on mortgage qualifying income. There are cell phone apps that help with this tracking, but one of them might have been created by a client of mine (Bay Area, right?) making me a biased source for a specific app referral. :P

For book authors like yourself, things are often a bit silly. We have to wait for that newly published book's income to appear on tax returns, but by that time the initial rush of book sales will be over, and YTD will be less than historic (and, thus YTD will be used), unless you're constantly putting new books out, hurting your calculated income. So Steven King and the Game of Thrones guy will be fine, but the one-time author can have a hard time of it, since by the time we can count the income, most of that income is gone.

#1 thing I see landlords get wrong is Schedule E box 2, "Fair Rental Days." You purchased the property in August of last year, how can your "fair rental days" POSSIBLY be 365 for that year when you only even owned it 4 months and change? CPAs and/or CPA software default to putting 365 in there no matter the reality, so you have to micromanage this.

We spend a lot of time internally going over income calculations, and we do this for a living, so a full and complete answer is beyond the scope of one post. You can of course always give your lender a rough draft of your tax returns, before you file them. Sometimes the same write-off can be on line A or line B, and that choice can make a difference.