Rental Exepsnes and Debt to Income

9 Replies

Hi all, looking for a quick overview of which type of rental expenses counts against your debt to income ratio and which do not? For instance, I am assuming that any utilities I pay are a straight expense, but what about materials for a kitchen remodel? I assume those would be depreciated and would not count as an expense against income for loan qualification purposes?

Updated about 1 month ago


@Todd Ashley it depends, are you talking about a loan other than a loan to purchase or refinance an investment property? Or are you talking about some type of personal loan and you want to know how your investments will count against the personal loan?

Even given the above it will also depend on the lender.

But regarding improvements that increase the value of a property they are "capital expenses" they should not show up in any evaluation of profit and loss (income and expenses). They are Balance sheet items. In other words they show up as part of what you own vs what you owe. A outflow of dollars for any for "capital expenses" increases your net worth. 

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@Ned Carey

Thank you, that is very helpful. In this case I am thinking about future loans for properties or potential refinance(s) (not personal loans). 

Most lenders will only count 75% of your rental income towards your DTI for a rental property. Your remodeling expenses should get added to your basis as an "improvement" and be depreciated.

If a lender looks at your tax returns to determine past rental performance, then it all depends upon how your CPA recorded your maintenance expenses and utility expenses. If they wrote them all off this year then your NOI would go down vs depreciating them over the IRS defined useful life for that item.

If you want to increase loan-ability, it is better to depreciate those items over a long period instead of writing them all of in the same year in order to increase tax return NOI.

This is NOT legal or tax advice, I am not a CPA. Please consult with a CPA or attorney.

@Marc Rice      Bingo! This is exactly the type of info I am looking for. Can you depreciate utility expenses? I am assuming you don't mean actual utility bills. Thanks! 

There are a half dozen or so ways to calculate rental income. It's scenario dependent.

For a rental property that you have owned for one full tax year, your Schedule E is nothing more than a profit and loss statement, and is taken as such, with a few modifications where we have better information than what's on the P&L:

Note that we do not even look at the bottom line number, lines 21 and 22 are not directly used in any calculation.