Birmingham, AL · Member since 2014 · 178 posts · 75 votes
When is it correct to maximize rental income reported on our SCHEDULE E (Form 1040) for additional mortgage qualifications?
For example, an investor already has a few preforming rentals purchased last year. Now that investor is depending on the income form the rentals to offset his debit to income ratio. Must this investor skip out on tax breaks, such as deprecation, in order to prove his income to the lending institution? Further more, would only bank statements, showing rental deposits and expenses, stand as proof of income? Even when the investors tax documents show a smaller annual profit.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
10y
Deposits are NOT income, they are a liability with cash on hand for future agreements.
Better question is when is it best to take every tax advantage you can find to reduce taxable income? When you are not going to be seeking financing in the next 2 or 3 years.
Overstating taxable income can take you to mortgage fraud, no one says you must deduct expenses, you must recognize depreciation at some point, but let's not overstate income to show up better on a loan application. :)
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
10y
Deposits are NOT income, they are a liability with cash on hand for future agreements.
Better question is when is it best to take every tax advantage you can find to reduce taxable income? When you are not going to be seeking financing in the next 2 or 3 years.
Overstating taxable income can take you to mortgage fraud, no one says you must deduct expenses, you must recognize depreciation at some point, but let's not overstate income to show up better on a loan application. :)
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
Just report correctly. I used to think the same thing but my lender assured me they will add back depreciation. She knows it's a 'phantom loss' and was kind of insulted I thought she wouldn't see through it.
This mickey mouse shell game stuff is why I quit playing with banks altogether 5 years ago. Proper seller-financed deals are the route for me. Cheers!
Lender, RE Broker · Renton, WA · Member since 2015 · 100 posts · 22 votes
10y
They look at your Schedule E because they want to assess whether you have the liquidity to pay back the loan. Depreciation expense is not an actual cash outflow so it will add back to your net income. Cash flow analysis and Income analysis are two different things.