Learning how important a good accountant is

[Tyler Rowley]

When I did my 2021 taxes, I wanted to position myself as making enough money so that I could qualify to buy another investment property in 2022

I actually didn’t take all of my deductions for one of my houses so that I could show some income for it. I left a profit of $13,000. I was under the impression that, for example, if I had $80,000 in revenue and $80,000 in deductions, that house would show $0/monthly when a bank ran my debt/income ratio. 

But I recently learned that’s not how it works. I was working with a bank to do a refinance and he was showing me how he was calculating my debt/income ratio. I noticed he was giving me credit for $3,666/m for the aforementioned rental house. “But $13,000 divided by 12 months is only $1,083,” I said. “Why are you giving me credit for $3,666 per month?” 

He showed me the formula/equation they use to determine monthly income for a rental house. I had no idea it worked like that. 

If I showed a $0 profit for that rental house on my 2021 taxes, the bank would have looked it as $34,000/year. That blew my mind.

QUESTIONS: 

- First off, does all of this sound accurate? I hope I didn’t misunderstand what this guy was saying. 

- I am assuming this is one of the reasons people say real estate offers great tax benefits?

- Do different banks use different formulas/equations to determine rental property income? Does the one I stated sound standard? 

- One of my rental properties is a seller-financing deal I bought in 2022. Would the bank’s income determination for that house work the same way?

- I have another rental house of which I am on title, but my parents are on the mortgage. The income I take for that house is reported on a Schedule C (sole proprietor income). Should I figure out a way to get my name on the mortgage for that house so that I can take advantage of these income/tax benefits? What does that process involve? 

THANK YOU, tyler

[Michael Plaks]

@Tyler Rowley

In reply to the title of your post - no, a good accountant is not important at all. In fact, accountants should be avoided altogether because they force you to do things by the rules, they bore you to death explaining those rules, and, worst of all, they insist on getting paid for all this nonsense. <sarcasm mode off>

Now, getting you specific advice here is not realistic. There're many important pieces in your situation, and only after a thorough discussion - I'd say a good hour - can somebody give you a responsible useful advice. Any shortcut generic answer, like - sure, do this.. - should be ignored. We clearly do not know enough about your case to render such an advice.

A couple of general observations:

- based on your description, you do not yet have a good grasp of how taxes work with real estate. You expect an answer to "does all of this sound accurate?" as if it's a yes/no question. It's a very loaded question, and definitely not everything is accurate, and a lot more is simply not clear what you quoted. One of us evil greedy accountants should explain these concepts to you one day.

- you're mixing together taxes and financing. They are not very compatible. Often, what is best for you tax-wise would undermine your financing options, and vice versa. It's a complicated game, and, to answer your question, not all lenders interpret your financials in the same way. All of them do (or at least should) add back depreciation, which means your rental income for financing is higher than your tax return shows. Beyond this, underwriting policies vary, and so does competence of specific underwriters

- you're not exactly at liberty to manipulate property ownership and its presentation on the tax return. The IRS requires reporting based on the actual facts of how it is structured and not on what some paper says. It matters who actually has the rights to the "benefits and burdens" of ownership. Maybe you're co-owning this property with your folks in this regard, and maybe you're not.

Trying to figure this all out in a free online forum is not realistic.