Tax write-offs and their impact on DTI

[Mitch Davidson]

Hi friend,

As you may or may not have heard, today's real estate expenses and write-offs may have a severe negative impact on your ability to qualify for Conventional financing tomorrow. And compared to other financing options, with the exception of commercial, Conventional is usually going to present the lowest note rate, so it's quite worth prioritizing.

While most write-offs will effectively lower your qualifying income for a Conventional loan, not all of them will.

When analyzing your 1040's Schedule E (where rental income is usually reported), we add back these write-offs to your net income: (a) depreciation (don't miss the opportunity here...this alone can pay the CPA bill!), (b) taxes, (c) insurance, (d) mortgage interest, (e) HOA dues, (f) casualty loss (uncommon), and (g) amortization (also uncommon).

For example, if your rent receipts totaled $80K, your net profit was $10K, and the total of the items listed above was $28K, we would see your income for the property to be $38K not $10K. We would not add back money you spent on repairs, maintenance, capex, advertising, legal, etc. Meaning, those type of write-offs would lower your income and increase your DTI. Also, note that there is no limit to the depreciation we can add back, in case you conducted a cost segregation study and thereafter wrote off an abnormally large sum of depreciation.

Hope this is helpful to you!

[Sergey A. Petrov]

I think the point here is that DTI is debt to income where "debt" is the sum of your monthly payments related to the debt and "income" is all of your income. For the debt/monthly payment purposes, most lenders include principal, interest, taxes, and insurance (sometimes HOA fees). So if the "debt" already includes taxes and insurance, they need to be removed/added back to the income part otherwise they are double counted, once on the debt side and once on the income side (because your net income subtracts those). Depreciation and amortization are always added back in as well