Lender · Saint Louis, MO · Member since 2016 · 18 posts · 11 votes
As a lender one of the biggest mistakes I see on a weekly basis from my investors are tax returns that are simply to aggressive. What I mean by this is that everyone is hell bent on not paying any taxes and instead investors find thousands and thousands of dollars of expenses on each property, which creates a loss on your returns. You may be able to withstand a loss on 1 or 2 properties, but after you collect several and you're losing several thousand a year on each property, that immediately decreases your overall income making it harder and harder to qualify for a loan. My advice to any investor is to not go overboard with your deductions, even if that means paying some taxes. What really stinks is when your lender tells you that you cannot buy another property because your CPA was to aggressive. I recommend having your lender review your returns before you file so adjustments can be made if necessary!
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
8y
Story of my life. I discuss this with clients ALL.THE.TIME. The key is that you MUST declare all of the expenses it takes to legitimately run your business/manager your property. You don't get to choose the amount you declare for repairs, utilities, management, etc. What you paid is what you declare.
The finesse comes in those Expense vs Capitalize repair issues. Sure, you CAN expense lots of stuff under DeMinimus Safe Harbor, but should you? For loan qualification purposes, you might be better off capitalizing. I know, I know, more to the IRS, but it's up to you to decide which dragon you're going to chase - more real estate or lower taxes. Cause you can't have both, unfortunately.
Further decisions are those "optional" expenses. You do not have to declare your mileage, your cell phone bill, your home office, etc. But just know that, if you do, your taxes go down but so do your chances of getting a loan.
I have a mortgage broker/friend who refers his clients to me all the time. The first one was a guy who had 3 rental properties that he hadn't been declaring on his tax return. Got angry when my friend said he didn't qualify for a mortgage. "But I have all this rental income!!!" he shouts. "Prove it", says my friend. So referral to me to amend the last 3 years of tax returns to declare all the income. Client is further angry because now he has to use the money he had for down payment to pay the back tax bills.
Sorry - sucks to be you. You don't get it both ways. (Happy ending - he saved up more money, went back to my friend and bought a rental the next year)
Further referrals from this friend haven't been nearly so bad. People who forgot to take depreciation on their rentals (no effect on their tax bill and/or actually a refund) but makes no difference for a loan. Just something my friend caught as he was reviewing their applications and recommended they talk to me. People who report their rentals all wrong (Miscellaneous Income?), etc.
For other CPAs just getting started, I highly recommend talking to mortgage brokers and/or their underwriters. This has been a great referral source for me. I sometimes feel like one of those credit repair places, but for taxes.