Schedule E tax question

8 Replies

I am looking for some help to clarify the way that income reported on my taxes will affect my debt to income ratio?

It is my goal to minimize my income as much as possible using legitimate  expenses and depreciation etc. However I think I may be confused about how my lender will view that when they decide my debt to income ratio for future loans.

If I report a net loss from an income perspective will my lender interpret that negatively or will they utilize the reported rents as the offset to help my debt to income ratio?

for example if I earn 15k in rents in a year but show a net loss of income of -2k will my lender use the 15k in rents as a positive for my debt to income or will they use the net number and use that house to decrease my borrowing power?

Let's hope your lender is tax sophisticated enough to appreciate legitimate tax planning and reporting on your Federal income tax return.  In all reality, if what you've done from a tax perspective is sound and the economics are supportive, I think it should actually enhance your standing in lenders eye.

@Chris Mason might be able to help. 

I know many lenders adjust taxable income/loss when they're doing underwriting 

Originally posted by @Aaron Murphy :

I am looking for some help to clarify the way that income reported on my taxes will affect my debt to income ratio?

It is my goal to minimize my income as much as possible using legitimate  expenses and depreciation etc. However I think I may be confused about how my lender will view that when they decide my debt to income ratio for future loans.

If I report a net loss from an income perspective will my lender interpret that negatively or will they utilize the reported rents as the offset to help my debt to income ratio?

for example if I earn 15k in rents in a year but show a net loss of income of -2k will my lender use the 15k in rents as a positive for my debt to income or will they use the net number and use that house to decrease my borrowing power?

 I know everyone hates this answer, but it really is "it depends." I'll offer few generalizations...

- Depreciation is great! It reduces your tax burden, and lenders can add it back.

- Yup, rent counts. Make sure "Fair Rental days" is accurate if you only had it rented part of the year.

- Any repair that you want to make the argument was "one time" in nature, keep the invoices/receipts. 

@Aaron Murphy

Most lenders reduce your rent by 25% to begin with. My lenders are not sophisticated and look at expenses as capital improvements and maintenance as the opposite of income. If real estate is income is negative they don't make any concessions. I wish I had better lenders that could realistically look at income expenses and depreciation with common sense but have not found it. 

I did find that when I did a rollover from one Ira company to another the banks counted that as income as well as when I did a Roth conversion the next year. Stupid but I did not look a gift horse in the mouth. 

Even though I had more than enough money in the IRA the banks won't consider IRAs as income unless you use it. The fact you don't need to use your Ira because you bring n enough doesn't matter. I am also old enough to take distributions without any penalties.

Expect it to be difficult in this economic environment. 

@Carl Fischer

Thank you for the detailed response. I want to make sure I am understanding you.

Are you saying that if I have income from a rental property and then offset that income using expenses-- its likely that the lender will apply the mortgage as a debt in my debt to income ratio but because I have reported net income as say 0 because of expenses and depreciation they will not give me an offset for the rental income that I bring in?

so in an example 10k in income and a loan of 100k dollars and a monthly payment of 600. That 10k will be reduced to 7500 then if I show 7500 in expenses they will count the 600 as monthly debt and not provide me any income to balance against it?

@Aaron Murphy

Yes that is the way they treat me today even when they beg me to take a loan. I've never seen it this tight prior to 2009. 

They used to give it on your tax return income and a smile. No longer the case for me. 

@Carl Fischer Well that's not what I had hoped but if that is how it is I understand -- Thank you for your help!

@Aaron Murphy

I don't like it either. Mortgage brokers are sometimes  better and know how to present to lenders. Talk directly to some brokers in the area of your properties. Get it straight from the horses mouth. 

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