Which write-offs will help or hurt for future mortgages

[Mitch Davidson]

Hi friend. 

As an STR investor and mortgage loan officer as well, much of my focus this time of year is on helping my clients prepare for upcoming loans, and specifically on how to maximize their DTI. Some of my clients wrote off far too much rental income in 2020, and have therefore been on pause for a Conventional loan. With their 2021 federal return they can perhaps put themselves in a better place, by following the guidance below.

Full disclosure, I am not a CPA, nor a licensed tax professional. (If you're local to me, meaning Asheville, I'm happy to refer you to a good CPA). I'm only telling you here how mortgage lenders compute your DTI based on investment homes and self employment.

For Schedule E (where rental income is usually reported...consult a CPA on where yours should show), we add back these write-offs to your net income: depreciation (don't miss the opportunity here...many put $0 here...this alone can pay the CPA bill!), taxes, insurance, mortgage interest, HOA dues, casualty loss (uncommon), and amortization (also uncommon). For example, if your taxable income in line 26 is $1,000, but among your write-offs you included a $1,200 insurance cost, we'll look at your income as $2,200. We won't, however, add back money you spent on repairs, maintenance, advertising, legal, or other categories not listed in the ones above.

For Schedule C (if you also have self-employment income, including 1099), we add back these write-offs to your net income: Depletion (uncommon), Depreciation (often a missed opportunity!), business use of home (also often a missed opportunity...get a CPA to get this right for you though), business mileage (not fuel; only mileage), amortization (rarely applies), and casualty loss (also uncommon). For any other write-offs, such as advertising or travel, we cannot add the expense back to your income.

Likewise, a few add-back type opportunities apply for S Corps and partnerships, the most common of which is depreciation.

Hope this helps.