How much in tax deductions should I really take

Question

I'm reading Amanda Han's Book On Tax Strategies, about taking every possible tax deduction.  A question the book doesn't seem to answer- If I deduct everything I can doesn't that make the property cashflow less or even take a loss on paper?  And when I try to buy my next investment property, mortgage brokers don't want me owning properties taking a loss.  So would I be shooting myself in the foot when trying to scale and deduct as much as possible at the same time?  How do you find a balance with this?  What am I not understanding?

Bill Hampton · Answer

@Greg Seivert

Most lenders that work with real estate investors understand that you may show a paper loss and they won't hold it against you. If one lender says no, find one that will say yes.

A second option is getting a DSCR loan.

Lastly, knowingly leaving deductions off of your tax return to qualify for a loan is mortgage fraud.

Good luck.

Dylan Brown · Answer

If you're in real estate, the biggest lever you have to pull is depreciation. I agree with maximizing deductions—and like others have already mentioned, intentionally leaving deductions off a return to make things look better for a lender is fraud.

In your position, I would focus 90% of your effort on maximizing depreciation. This is most commonly done through a combination of cost segregation and Real Estate Professional Status (REPS), but there are other strategies as well that can help you increase depreciation.

Keep in mind that unless you qualify for REPS, any losses beyond breakeven are likely to be suspended as passive losses anyway. So the general order of operations should be:

• Focus on maximizing depreciation;
• Then assess REPS or the short-term rental (STR) loophole;
• If you qualify, look at further ways to drive losses.

Focus on maximizing depreciation;

Then assess REPS or the short-term rental (STR) loophole;

If you qualify, look at further ways to drive losses.

Of course, this is a general framework—specific facts and circumstances could shift the strategy.

Basit Siddiqi · Answer

You are required to file a complete and accurate return, which means reporting the income that you earned along with atleast the direct expenses that you incurred on your rental.There are two comflicting forces - Your tax accountant wants to be aggressive with deductions because it will entitle you to paying less taxes(now or in the future).Your lender wants to see as much income as that will increase your Debt to Income Ratio(DTI).The good thing is that you can speak with your lender about 'one time expenses', that were only incurred in that year and are not reoccuring. The lender may want a certified letter from the accountant to verify this fact.Best of luck!

How much in tax deductions should I really take

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