Write offs/expenses VS. Remaining profitable

[Dillon Dull]

So I have been thinking about this for some time. It seems like everyone tries to do everything in their power to increase their expenses and write-offs in order to not show any income to pay taxes on for their businesses. However with real estate investing couldn't this be an issue when trying to get approved for loan? When the bank sees that your business or real estate company is not or only slightly profitable wouldn't this make it tougher to take out more loans to buy more properties?

[Michael Plaks]

@Dillon Dull

This is a classic catch-22, and it does not have a yes-no answer.

You really do not have liberty to increase expenses, except in couple specific areas. The biggest one is deciding between capitalizing (depreciating) expenses vs deducting them. Whether or not it will affect your eligibility for funding completely depends on the type of funding you're seeking and on your particular lender.

It's worth discussing it in advance with your potential lenders and then choosing your tax strategy accordingly.

Now, some investors choose to simply not claim part of their business deductions, in order to show more profit on their tax returns and thus qualify for financing. While they often do get approved for financing this way, keep in mind that in the process they probably commit both tax fraud and mortgage fraud.