3 Real Estate / Tax questions I need some help in understanding

Buying & Selling Real Estate
9yFollow

3 Real Estate / Tax questions I need some help in understanding

Michael Dunn
Olive Branch, MS · Member since 2013 · 452 posts · 10 votes

1. How does me Making $10,000 a year from Rent from one Rental property , come into play , via Taxes on this $10,000 ?

Can i keep all $10,000 of this as Pure profit and Pay no taxes on it via Writing off certain things ( Taxes, Interest, Insurance and Depreciation ) ??
But if I do this , and write off all of this , how then would this " Look " on my taxes, meaning...... wil it show me as taking a " Loss " on this Rental ?

I am trying to MAKE SURE I show this $10,000 ( or at Least $7,000 of it ) as Earned income / that it gets Included in the Total of my Gross Income for the year ( along with the Income I earn from my Job Job )

I am trying to MAKE SURE that when a Lender goes and looks at my taxes, that they DON"t see a " Loss " on this Rental , and thus they aren't able to use this $10,00 ( at least $7,000 ) in my Overall Income ( Gross ) total , for when then run the Numbers to determine how much Note ( PITI ) I can afford/Qualify for , as well as when they figure out what my DTI calculation # comes out to

2. If I started to collect Rent on one of my Rentals in February ,
and then come September I go to try and get a Loan for another Rental ....... Would a Lender use this 7 months of Rent I have collected , as Actual Earned Income I have made , and thus they'd add it in to my overall GROSS income for the year ?

3. If you start renting a Property in October , do you have to factor in and file all the Rent you have received for that Years Taxes ?

Thank you so much for any and all help

0Reply
29 views

4 Replies

Jump to latestLatest
  • Derrick Dill
    Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
    9y

    1. If you made 10k in rental income it's added to your adjusted gross income. Let's say for example, you made 100k from your job, then your income will be 110k (100k + 10k rental income). You always pay taxes.. you can lower your tax burden with (taxes, insurance, interest, depreciation).  These are not examples of rental "loss".

    There will be a box that very specifically annotates "rental income" and you can MAKE SURE it's included.

    2. This varies between lenders, but generally they use 75% of the rental income (ex. rent is 1,000$, they include 750$ in your DTI) until you get a full year of rental income, then they can report the full 1k in your DTI.

    3. Yes.

    Disclaimer: I'm not a tax professional, just a real estate investor who's familiar with tax code.

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    First of all, let me say that if you show rental income WITHOUT any of the normal associated expenses (depreciation, property taxes, maintenance, etc), a talented mortgage underwriter will start asking A LOT of question.  Secondly, if you have a mortgage on that property, it will show on your credit report, so a talented underwriter will know to look for it on your rental income schedule (Schedule E).

    Second of all, if you have expenses associated with your rental that you choose not to write off so it will look better to the mortgage company, this is technically mortgage fraud and yes, you can go to jail for it.

    The way my mortgage broker explained it to me is that they take 75% of the rental income (I don't know why - probably to account for possible future vacancies?) and add that to your other income when computing your DTI (Debt To Income) Ratio. They then add your mortgage payment and HOA payment as a debt payment as well as an average of other recurring payments such as management fee, utilities, etc. They also add depreciation back to the formula since that is a non-cash expense and they are really looking at cash transactions.

    I actually had a client recently sit across my desk from me and say "We're trying to go for a mortgage, so we need our income to be as high as possible.  But we don't want to pay a lot of tax."

    I just looked back at them, blinked a few times and said "these are opposing goals.  Pick one."

    In order for your rental income to count towards your DTI calculations, it must show up on your tax return. So picking up a rental in Feb and trying to use that income later that year won't work.

    Yes, if you rent something in October, you have to declare that income.  All of your income is reportable all the time.  The time of year when it started has nothing to do with it.

    Podcast Guest on Show #244
    0Reply
  • Michael Dunn
    OP
    Olive Branch, MS · Member since 2013 · 452 posts · 10 votes
    9y

    Derrick Dill  and  Linda Weygant  , 

    Thank you very much for your reply 

    So to clarify and make sure ....... When that $10,000 is added to my overall Income, I will pay taxes on it , just the same as I would on any other Income from ... my actual Job ?

    But then, when I Wrote off things on that Rental property such as the Interest, Insurance, Taxes and Depreciation this year for it , I ended up with a " loss "  of  $4,000 

    I am trying to make sure, that before I submit my taxes in and file it this year , that when a Lender Goes to look at this year's taxes sometime this year  ( When I hope to purchase another Investment Property  ) , that they will NOT see that  $4,000  " Loss "  and thus not use the $10,000 I made from Rent money , as part of my Overall Gross Income for last year ??

    As to the use of  75% of the Rental Income , and the Use of Rental Income as a whole....... I have been told by multiple Lenders, that the use of  75% is the standard, as they account for Vacancies and Maintenance Expenses accounting for the other  25% ?

    What I am wondering is ....... Since this is my First Rental , I have been told that it has to be shown on 2 years worth of Taxes, before they ( lenders ) will use the Rent Money I made as part of my Overall Gross Income .

    If this is the case, then do Rental properties number 2 , 3 ,4 , 5, etc.  Will these also all have to go through a 2 year Period of being shown/filed on my Taxes before they will use the Rent received from these Properties as Part of my Gross Income ?   

    OR 

    Is the First Rental Property you have, the ONLY one that has to go through this 2 Year cycle of being shown on your Taxes, and then any Rentals you aquire from there after ........ The Lenders will use the Rent Money you make on these Rentals Immediately, WITHOUT having to be shown on your Taxes for any Period of time...... So you could then have earned say  $3,000 on Rental property #2  over a 5 month period  ( from August - December ) and they will use this Rent Income as Part of your Overall Gross Income for that yer ?

    Thank you both again very much for all of your help . Been a huge help to me as I try and understand the process and how it all works - Michael 

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I hadn't heard that rentals have to show up for two years.  My mortgage broker counts them after the first year.  Self employment income has to show up for two years, so maybe that's the confusion?

    As far as showing a loss of $4000, it depends on how that loss is calculated.  Your depreciation expense gets added back to that number for mortgage qualification purposes, so if after you add it back in, you're sitting at a net profit, then you're overall in a good position.  If it's still a loss even after adding back the depreciation, then that will definitely count against you.

    Podcast Guest on Show #244
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free