SEP IRA contribution and loan qualifications - DTI calculations

[Eric C.]

I am looking to make a sizable SEP IRA contribution to reduce my tax liability, but I don't want to hurt my ability to borrow in the future by not making enough income. Is SEP IRA contributions added back in the way that depreciation is or will it permanently reduce my income on paper, even though the money is mine?

[Bernard Reisz]

@Eric C. Deductible SEP-IRA contributions are distinct from depreciation - while depreciation represents "paper losses," SEP-IRA contributions represent real changes to to your business and personal cash-flow; the money contributed to a SEP are real dollars that can only be used by the SEP. Notwithstanding, SEP contributions are voluntary and discretionary (depending on your structure), so a banker/lender should recognize that, prospectively, such contributions are not necessary operating expenses.

The upshot of all this is that you should reach out to your mortgage broker and lender ahead of time. Recognize that some education and dialogue with them can go a long way. Results will vary by loan type and lender.

An alternative that may resolve your dilemma is the use of a SD401(K), which allows far greater tax deductions than a SEP and allow you multiple routes to use the funds for real estate investment. Those possibilities may eliminate the conflict your having between tax deductions and RE investment. For some more info have a look at SD401K vs. SEP-IRA.