Need help/advice/suggestion for tax and Mortgage structure

2 Replies

Scenario:

I started buying condos beginning 2011. Each year I bought 1-2 properties which needed extensive work.

To build my rental portfolio and offset taxes, I used to buy properties that needed work that was equivalent to my rental income. For Eg. Property A (Rental income $5000/year) + Property B (Rental income $5000/year)

I would buy Property C that requires $10,000 worth of work so that I can list that as an expense and break even on taxes.

Due to this, the taxes I had to pay were negligible. Besides that, I don’t have W-2 either (quit my job last year. Able to survive from savings)

Facts:

Out of 10 properties only 1 has mortgage, rest paid off.

All properties are under my name and have no LLC. (Which I should have done!)

Issue:

I am unable to get good rates for mortgage as I have no income on paper.

Question:

Is there a way to get better rates on mortgage?

What are my options

CPAs have some discretion for what they "Depreciate" over several years, and what is written off in one year as a "Repair." A light bulb is always a "repair," a new roof is always "depreciated" (with most CPAs), but things like a fridge or water heater can (according to what I see on these tax returns and assuming CPAs know their stuff) be either. 

Mortgage underwriters assume by default that "repairs" are annual, recurring in nature. 

Mortgage underwriters assume by default that "depreciated" expenses are one-time and extra-ordinary, and as such "add back" the number to your income without even requesting any supporting documentation at all.

I'm not telling you what's "right" or what the tax code says or what is reality (I'll pass on the debate, too), I only know how underwriters following the Fannie Mae guidelines (where the best rates are to be found) view it.

If Sally and Billy are otherwise identical, but Sally "depreciates" as much as her tax pro says she can, while Billy writes everything off as a "repair," Sally will have a crap ton more Fannie Mae "mortgage qualifying" income. Billy will have more write-offs and a lower tax bill in year 1 (instant gratification) but gets jammed up when it's time to apply for a mortgage, while Sally gets that same dollar amount tax break spread out over multiple years (delayed gratification) and has less problems growing her rental empire and getting additional mortgages. 

Conventional lenders will likely not be an option. Non-conforming lenders are going to be your only option, unless someone else speaks up. My dad did the same thing and got denied recently due to zero income on his taxes and he owns 2 million in properties free and clear. Same problem.