Write off or not to write off, that is the question!

11 Replies

Hello BP!

Wanted to get your thoughts on write offs for your business and whether it is worth doing? This could apply to a real estate business or other small business. Basically I jumped off the deep end and quit my W-2 job in May to go full time with my handyman business as well as pursue RE endeavors. Now that I do not have a W-2, financing is going to be tough for future purchases.Wife stays home with the kiddos, so no income there. 

Right now I am waiting for a seasoning period to end to refi on my first BRRRR property. However, the income from my business has been greatly reduced because my CPA took advantage of writing off as much as we could to reduce taxes over the last several years. Side note, I have been running my handyman business part time for 3 years while I was working full time and so business income has been recorded in the taxes. The problem will be what my 'income' shows after write offs is low.

The question is, How do you know how much stuff to write off to make sure you don't shoot yourself in the foot for financing? A CPA is not going to know what a bank is looking for, correct?

I recall one of the podcast guests talked about not writing off much because he rather pay the taxes and be able to get financing than not pay taxes and not be able to finance properties.

What are your thoughts and opinions? Write off as much as possible or just a small amount?

I think what I need to do is find a lender who is willing to work along side of me and realize that the properties will cash flow positive after all expenses are accounted for. Basically let the property speak for itself instead of my income guaranteeing it. I know this goes more for commercial loans, so maybe that's what I need to look into but I am interested in BRRRR method so commercial loans are not the correct avenue for that. Having a pile in my retirement accounts I do not think holds much weight in the eyes of the lenders? Maybe ill find a lender in a walmart like Arthur Garcia.

@Kevin Moules

Believe it or not, the IRS requires you to take all the deductions you're entitled to. You can't just decide to not claim something you spent. Not that they have any mechanism to enforce it, but it's a rule. 

Where you have some control is certain specific areas like depreciation and repairs. These decisions do not remove the deductions but push them into the future. And depreciation does not really matter for financing, because lenders add it back when calculating your income.

Every time you push a deduction into the future, your income goes up, but so do your taxes. I lost count how many times I had clients requesting to minimize deductions to qualify for a loan - and then promptly reversing the course once they saw their tax bill. You cannot have both. You either go after funding or after minimizing taxes, have to choose.

The common solution is to finance your properties with asset-based loans: those that are based on the property value and not on your income. Private money is #1, in particular money from other people's retirement accounts. Looking for properties that can be owner-financed or where the seller's loan can be assumed (called "subject-to") is #2.

@Kevin Moules

Ignoring the tax mechanics, knowingly providing lenders and banks with tax returns or other financials that do not reflect the economic reality of the property in order to increase the chances of obtaining a loan or obtaining more favorable terms on a loan may venture into the realm of mortgage fraud.

That said, there may be acceptable opportunities to increase current year net income at the expense of future year net income by pushing deductions to future years.  Your CPA should be able to provide more info.

@Michael Plaks , Right now my income will be from my handyman business. So what I am hearing is that expenses like tools, job materials, vehicle maintenance costs must be deducted according to the IRS from my gross income. We just got into real estate so i understand the depreciation side is taken out. I am not making much as far as cash flow is concerned so bank is not really looking at rent as part of my income. I can see why people would reverse their decision on the tax bill. I was going to pay about 9K in taxes several years back which I did not like and CPA depreciated a vehicle I bought for the business and greatly reduced that. It felt good not having to pay the extra to uncle sam. I agree on getting a little more creative on the financing. I know about subject-to but not comfortable with that strategy. The owner finance is what I really would like to do. We used that method for our first flip. It was a great thing! Thanks for the help.

@Eamonn McElroy , thanks for the advice. Like i mentioned, i am more talking about the write offs related to my handyman business than the real estate side of things. I know depreciation is taken every year and can be pushed. Just wondering folks who run real estate businesses do they try to claim every little thing like mileage, food, office rent, ect.. Does the IRS care that you don't claim these expenses? I thought they cared more about you not claiming income and trying to do things under the table than not claiming write offs to reduce your taxes. 

Thanks both for your input, that's why this site is awesome!

I'm naturally opposed to overpaying taxes. With that said, I don't recall reading in the tax code anything "requiring" you to claim any deductions, only what is allowed. If you are using the BRRRR method, then you will have an income stream from the rental and that will count as your income as well. If you have kept your purchase + rehab within 70% of ARV, then you should be able to get a bank loan through the commercial department of the bank. And, try to stick with the smaller, local banks and avoid the larger regional or national banks.

Originally posted by @Kevin Moules :

@Michael Plaks, ... I know about subject-to but not comfortable with that strategy...

Then I'd recommend getting comfortable with it  :)

@Kevin Moules it seems you are not the only one who has this concern. I work with a mortgage company that has a program specifically targeted to people in this position. The loan looks at monthly bank statements in place of tax returns to determine if the borrower is eligible.

@Bob Norton , I guess your first sentence is where I was coming from. I didn't think they "required" you to claim, but if you decide to then you can only do what is allowed. So who is right here @Amanda Kessler or Bob?

@Michael Plaks , There is always that pesky "due on sale claues". If I had enough money to cover the asset if the note was called I may think about it. I know from podcasts and reading that it is rare, but it does happen. That being said I would have to be direct mailing folks for rental properties. In CA where I am at this would be a good strategy for folks like me who bought their home 5-10 years ago. If i were to rent out my place it would rent for double the mortgage payment. That's why I want to move out of it and rent it out. It would cashflow like crazy. There is an investor in AZ who was on the podcast that does a lot of subject-to deals. I would have to have someone help me with the process before doing it on my own. Maybe someday!

@Tyler Bodi , thanks for the info! Do you work for them or so you use them to finance your properties? I see you are in KY. Does the bank lend to out of state folks?

Thanks all for sharing your info!

@Kevin Moules I am a Realtor and they are a lender that works out of our office. They also have products specific to investors where the property is the key qualifier for the loan. They are in a few states and California is one!