Tax write off and ability to purchase

7 Replies

This is a question of writing off everything on your taxes for that big tax break vs the ability to get approved for a high loan amount. I have a really good W-2 job in addition to my rental properties. Last tax season I wrote off everything I could (depreciation etc) on all of my properties. This gave me about 10k back, score! right? Not so fast. In the process I was buying a duplex. My lender told me that how I did my taxes lowered my income dramatically which would have prevented me from buying the duplex. I had to pay my CPA again to redo my taxes and he did them in a way that I owed nothing (bye bye 10k) and I was able to get approved at a higher loan amount. My question is, I see many people posting about these great tax saving while they are out there making more purchases. How are you able to balance the two to keep you conventional financing available?

Many people pay off some loans to keep others available others do the algebra on what they make room a purchase vs what they pay in taxes and make a decision based on that.

@Kevin Kite Foregoing legitimate tax deductions in order to get approved for a loan seems ridiculous to me, especially if it cost you $10k. Lenders should add back depreciation when underwriting your loan, as it's a noncash deduction. 

@Kevin Kite  

Your story does not add up. If you had a $10k refund disappear, you would have had $30k-$40k of losses from rentals that your CPA first gave you and then took away. These numbers are not normally possible when you have, as you said, a pretty good W2 job. Something is amiss. Unless he increased your income above W2 with positive rental income, which is a very questionable move.

Secondly, swinging that much in deductions back and forth is not usually possible, either. Even if he capitalized some repairs and dialed down on depreciation. Again, I'm uneasy about your story.

If he chose to not deduct expenses that you legitimately incurred - then it is actually illegal. In fact, illegal on two fronts: it is against the IRS rules (yes, believe it or not, you are required to take deductions you incurred), and it can be construed as mortgage fraud if you overstated your actual income by hiding your business costs.

Finally, as @Nicholas Aiola pointed out, all competent lenders add back depreciation during underwriting, so depreciation should not be changed for lending. As Master Yoda would say - strange this story is.

Now, generally speaking, your dilemma is real. Sometimes, business owners and investors do take less aggressive tax positions in order to qualify for a loan. Have to weight the relative importance, just like in many other business decisions.

@Kevin Kite

It is a dilemma for sure but one way to fix it is to make more money.

A second way —I use my W2 and give my wife all the real estate income and deductions so on our 1040, filing jointly, we get the max. For the lender we split my w2 income out, per underwriters requirements, and put loans in my name only. They require the separation because my wife won’t sign on the loan.  Dumb lending rules so find a lender that can work with investors. Borrowing has definitely changed over the last 4 decades so you must adapt. We are in a screwed up cycle right now. Logical underwriting isn’t really considered much today. 

Another way,  is to do a 60 day rollover of your Ira -just move $$$ from one Ira account to another Ira  and get a 1099. The underwriters count that as income even though it isn’t and your not taxed on it. Doesn’t make sense but that’s the rules. Government regulations take away from logic. 

You are required to adjust the basis in your property by the amount of depreciation allowable, even if you neglect (or refuse) to deduct it from your tax return. When you sell that property you are going to 'repay' the IRS for a tax deduction you never took. 

I am having trouble imagining a loan worth the price it seems you are paying for the one you now qualify for.

Thanks for the informed and helpful replies. You all gave me more to dig into.

I’ll have to go back through and see exactly what the CPA changed. I did have a bunch of receipts that he may have not included (I was writing off as much as I possibly legally could) vs ignoring the depreciation amount.   Also I only have 5 conventional loans.  I do know my income changed dramatically.  Before the year is over.  I want to grab another higher valued 4 plex

Either way, I’m going with a new CPA next year. 

Have to agree with @Carl Fischer - logical underwriting is an endangered species. The tricks that Carl described, plus others I have seen, defy logic and sometimes walk the line of being legal - but they do sometimes manage to get past the policy of the day that the underwriter relies upon. Sigh.