how do capex effect DTI?

[Gloria Mirza]

If I do something like replace a roof and depreciate it over 27.5 years, how does that affect my DTI?

[Chris Mason]

Originally posted by @Gloria Mirza:

My question was regarding the future affect on DTI for capex on homes that I currently own.

Are "one time" expenses added back to income even for more common capex? For example is the expense for a new water heater or fence added back to income when calculating DTI?

Hi Gloria,

- I'm not a tax pro, this isn't tax advice, don't do anything your tax pro says you can't or shouldn't do. :)

- IRS form Schedule E for reference.

- Any expense on line 18 "depreciation" can be "added back" to income no questions asked (your new roof being depreciated over X years being a good example), meaning that it will have zero impact on your DTI.

- Any expense on line 14 "repairs" can only be added back with a bunch of supporting documentation matching exactly & based on a human underwriter's judgement call on the "one time" nature of it (and how that underwriter's mood is on that given day) on a one-off basis. This can be a fight. On a recent one, we needed $7k added back, I felt we had $9500 in clear "one time" stuff, the underwriter came up with $4200 and we had to fight/escalate to get a smidgen over $7k to make the deal work (this was a refi of some other property to save a few bucks a month, not a purchase mortgage, so I felt OK about taking this risk). 

Rather than fighting with underwriting once in escrow and with earnest money possibly being on the line (or risking a refi falling through), I'd suggest having the friendly "fight" with your tax professional upfront in order to get as much as possible shoved into line 18 "depreciation." I already know that your tax pro will say "no" to depreciating light bulbs and repainting in between tenants (& they will LOL at the notion of depreciating a $2.50 light bulb), but start the "fight" there so that when you're done "meeting in the middle" maybe the new carpets and new water heater get "depreciated" instead of being a "repair." Does that make sense?