Deductions and Debt to Income Ratio

[Byron Broughten]

Hello!

I just closed on my first rental property (house hacking), and after taking a second to bask in the glory, I'm thinking ahead to the next one.

So I ask: if I claim a bunch of deductions (floor refinishing, bath surround, depreciation, paint, etc.) and try to buy another property in a year, might lenders consider the property to be operating at a loss and thus a source of overall debt rather than income, thereby harming my buying power, even if the property would count as a source of income if I didn't claim those deductions?

I would appreciate any insight.

[Chris Mason]

Originally posted by @Byron Broughten:

Hello!

I just closed on my first rental property (house hacking), and after taking a second to bask in the glory, I'm thinking ahead to the next one.

So I ask: if I claim a bunch of deductions (floor refinishing, bath surround, depreciation, paint, etc.) and try to buy another property in a year, might lenders consider the property to be operating at a loss and thus a source of overall debt rather than income, thereby harming my buying power, even if the property would count as a source of income if I didn't claim those deductions?

I would appreciate any insight.

 This is one of my "top 3 things to talk to your tax professional about!" on Schedule E, a presentation that is sometimes "hey CPAs, here's 3 things we should talk about for your landlord clients!"

Some things you MUST write off as "repairs," other things you MUST "depreciate" over several years, and some things are discretionary, meaning it's the taxpayer's choice. Talk to your tax pro to find out what's what.

If the priority is short term tax savings, you shove all of that 3rd category into "repairs." 

If the priority is being able to get a mortgage in the year following the filing of those taxes, you shove all of that 3rd category into "depreciation." 

Mortgage underwriters following Fannie and/or Freddie can "add back" any $ amount of depreciation to the cashflow of the property with zero documentation or back-and-forth required.