Tax write off and ability to purchase

[Kevin Kite]

This is a question of writing off everything on your taxes for that big tax break vs the ability to get approved for a high loan amount. I have a really good W-2 job in addition to my rental properties. Last tax season I wrote off everything I could (depreciation etc) on all of my properties. This gave me about 10k back, score! right? Not so fast. In the process I was buying a duplex. My lender told me that how I did my taxes lowered my income dramatically which would have prevented me from buying the duplex. I had to pay my CPA again to redo my taxes and he did them in a way that I owed nothing (bye bye 10k) and I was able to get approved at a higher loan amount. My question is, I see many people posting about these great tax saving while they are out there making more purchases. How are you able to balance the two to keep you conventional financing available?

[Michael Plaks]

@Kevin Kite 

Your story does not add up. If you had a $10k refund disappear, you would have had $30k-$40k of losses from rentals that your CPA first gave you and then took away. These numbers are not normally possible when you have, as you said, a pretty good W2 job. Something is amiss. Unless he increased your income above W2 with positive rental income, which is a very questionable move.

Secondly, swinging that much in deductions back and forth is not usually possible, either. Even if he capitalized some repairs and dialed down on depreciation. Again, I'm uneasy about your story.

If he chose to not deduct expenses that you legitimately incurred - then it is actually illegal. In fact, illegal on two fronts: it is against the IRS rules (yes, believe it or not, you are required to take deductions you incurred), and it can be construed as mortgage fraud if you overstated your actual income by hiding your business costs.

Finally, as @Nicholas Aiola pointed out, all competent lenders add back depreciation during underwriting, so depreciation should not be changed for lending. As Master Yoda would say - strange this story is.

Now, generally speaking, your dilemma is real. Sometimes, business owners and investors do take less aggressive tax positions in order to qualify for a loan. Have to weight the relative importance, just like in many other business decisions.