Not being able to count rents as income is killing me

Long Beach, CA · Member since 2017 · 107 posts · 82 votes

My tax guy is good, so he shows my rentals as taking losses with depreciation etc and as a result when I go to get more loans, I cannot count my rental income. Since banks will look at my mortgages but cannot count any rental income, my debt to income ratio is not accurate and my income is much lower as well according to their evaluation.

Is anyone else struggling with this problem? Are there any workarounds? Is it always a choice between tax benefits and loan approvals?

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Chris MasonPro Member

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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

Originally posted by @Chris Mason:

Originally posted by @Ken Virzi:

It seems all lenders tell me the same thing. That if the rents were on my taxes than we have to go with those numbers. On my taxes the properties are written down so much that it shows no income from the rentals. Those new rentals not on taxes yet can be counted at 75%. Are these not accurate?

It's not the full story.

If it's a truly cashflow positive traditional rental, and there is no tax fraud occurring, they will be cashflow positive per Fannie too, barring overlays.

There might be tax fraud, you might not be sharing the full story, there might be incompetent lenders, or you might genuinely not qualify because you have a bunch of cashflow negative real estate. There isn't a 5th possibility...

Actually I take that back. The 5th possibility is CPA incompetence. On my top 3 CPA pet peeves is "Fair Rental Days." The taxpayer/investor/person purchased the property on November 1, 2018. How could it possibly be that they rented it out for 365 days of 2018, when they purchased it with only 2 months left in the year? Why isn't "Fair Rental Days" 60 or less? You just told the IRS, as well as the mortgage underwriter, that a full year of rent is $4000!

$4000 / 12 = $333 per month in rent...

Speculation, but that's possibility #5. There is no 6th that comes to mind at present. We see it all the time in California, CPA software must auto-populate 365...

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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y
Depreciation can be "added back" and has zero impact on DTI.
When the mortgage math is done right, and the CPA does their stuff right, it's relatively rare for there to be a true DTI issue, unless the investor just quit their job or something like that. More often than not it's LO/lender incompetence in this niche. None of our pre-licensing education, or continuing education, covers anything to do with rental income. Same with actual mortgage underwriters. And you can go an entire successful 30 year career without ever learning it.
The only "workaround," assuming the tax code is being followed and everything is accurate there, is finding a new lender, one you have some reason to believe is more competent in this very specific niche.... you don't go to a general ear/nose/throat doctor if you need brain surgery.
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Ken Virzi
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Long Beach, CA · Member since 2017 · 107 posts · 82 votes
7y
It seems all lenders tell me the same thing. That if the rents were on my taxes than we have to go with those numbers. On my taxes the properties are written down so much that it shows no income from the rentals. Those new rentals not on taxes yet can be counted at 75%. Are these not accurate?
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y
Originally posted by @Ken Virzi:

It seems all lenders tell me the same thing. That if the rents were on my taxes than we have to go with those numbers. On my taxes the properties are written down so much that it shows no income from the rentals. Those new rentals not on taxes yet can be counted at 75%. Are these not accurate?
It's not the full story.
If it's a truly cashflow positive traditional rental, and there is no tax fraud occurring, they will be cashflow positive per Fannie too, barring overlays.
There might be tax fraud, you might not be sharing the full story, there might be incompetent lenders, or you might genuinely not qualify because you have a bunch of cashflow negative real estate. There isn't a 5th possibility...
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y
Originally posted by @Chris Mason:

Originally posted by @Ken Virzi:
It seems all lenders tell me the same thing. That if the rents were on my taxes than we have to go with those numbers. On my taxes the properties are written down so much that it shows no income from the rentals. Those new rentals not on taxes yet can be counted at 75%. Are these not accurate?
It's not the full story.
If it's a truly cashflow positive traditional rental, and there is no tax fraud occurring, they will be cashflow positive per Fannie too, barring overlays.
There might be tax fraud, you might not be sharing the full story, there might be incompetent lenders, or you might genuinely not qualify because you have a bunch of cashflow negative real estate. There isn't a 5th possibility...
Actually I take that back. The 5th possibility is CPA incompetence. On my top 3 CPA pet peeves is "Fair Rental Days." The taxpayer/investor/person purchased the property on November 1, 2018. How could it possibly be that they rented it out for 365 days of 2018, when they purchased it with only 2 months left in the year? Why isn't "Fair Rental Days" 60 or less? You just told the IRS, as well as the mortgage underwriter, that a full year of rent is $4000!
$4000 / 12 = $333 per month in rent...
Speculation, but that's possibility #5. There is no 6th that comes to mind at present. We see it all the time in California, CPA software must auto-populate 365...
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James M.
Rental Property Investor · Seal Beach, CA · Member since 2016 · 115 posts · 85 votes
7y
Agreed, if you are truly claiming your rents there should be no reason that a lender wouldn’t give you 75% value of the rents shown on your tax returns. I ran into the same problem where I filed my taxes, and 2 months later did a major renovation which increased scheduled income by 10k, but I had trouble getting a lender to use the new scheduled income because my tax return showed something different. I am not a lender nor do I claim to be an expert in this area, I am just speaking from past experience. I had to wait until my new tax return.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
I'll chime in too.
So choosing to leave off expenses to show more income = Fraud.
Depreciation should be added back by the lender. Chris brought up an excellent point- About 50% of returns I review for new clients the prior CPA put fair rental days at 365 by default. They have no idea this impacts any thing or what they're really saying by putting it there. Lazy data entry.
That being said, your CPA can work with you to strategically plan out some expenses. There are a handful of items you can choose to expenses on a shorter timeline vs. longer.
Typically clients want to expense everything possible to drop tax bill- but if it's fully expensed under deminimus- it's not added back as a depreciable item. This also now comes into play with the QBI deduction since there's a limitation related to qualifying assets well.
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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y
Originally posted by @Natalie Kolodij:
I'll chime in too.
So choosing to leave off expenses to show more income = Fraud.
Depreciation should be added back by the lender. Chris brought up an excellent point- About 50% of returns I review for new clients the prior CPA put fair rental days at 365 by default. They have no idea this impacts any thing or what they're really saying by putting it there. Lazy data entry.
That being said, your CPA can work with you to strategically plan out some expenses. There are a handful of items you can choose to expenses on a shorter timeline vs. longer.
Typically clients want to expense everything possible to drop tax bill- but if it's fully expensed under deminimus- it's not added back as a depreciable item. This also now comes into play with the QBI deduction since there's a limitation related to qualifying assets well.
Spot on, hire this accountant if in North Carolina.
For someone doing the final stage of a big brrrrrrr recently, writing it off up-front (bad for mortgage purposes) v depreciating it over several years (good for mortgage purposes) was an $80,000 difference. $80k less in expenses isn't much different than $80k of income. $80k makes a huge difference... and this wasn't tax fraud or anything shady, 100% legit.
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Paul DefnginPro Member
Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
7y
@Chris Mason, oh man. Spot on my friend.
That said, I wish more people just take the time to read their own Tax Returns and ask their CPA questions.
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