Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I'm self-employed, looking to apply for a mortgage after submitting my 2013 tax return (which will be the 2nd year of my sole proprietorship). Obviously, from the point of view of mortgage entitlement I want to maximise my income without unreasonably boosting my tax burden.
I know that deductions tend to affect the amount of income the bank considers you to have. For instance, I likely won't take the home office deduction, or depreciation, for that reason. But I had VERY hefty moving expenses in 2013 that under IRS rules I am entitled to deduct. It seems logical to me that these WOULDN'T be relevant in my mortgage application (in other words, the bank would add these expenses back into my income and my income would be correspondingly higher), but am I correct in that, do you think?
Less significantly, I'm also entitled to take a state sales tax deduction (including for the purchase of a car in 2013), and it seems to me that is also not relevant for my business income (ie. it would be added back in by the bank). Would that be right?
Very grateful for your opinions, any documentation you can point me to, etc. etc...
Thanks for the response Pfhtex, but I'm not quite sure what you mean. In 2012 I filed Schedules B and C with my 1040 and will do the same this year - is that what you're getting at?
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
44,551 posts, read 81,085,957 times
Reputation: 57750
When I moved here I bought a business and got a mortgage without any business revenue data, but I had about 25% down and that was way before the "bubble burst." From a more recent re-fi, they are concerned about your ability to make the monthly payment, so your tax records need to show two years of income sufficient to cover mortgage, taxes and insurance on the home. They are not as concerned with your deductions a your taxable income, and the schedule C and your profit/loss statement.
Thanks, Hemlock, that comes as a surprise to me as I had understood from one bank, and also previous reading, that the figure they take for income is income after deductions (ie. if you make $100k from your business but apply $100k in deductions and expenses, then you have no income for the purposes of the mortgage). I understand when we are talking about ongoing business expenses, but it wouldn't seem logical to me in the case of a one-off move and its related expenses, hence the question!
Okay, let's try to simplify this for you. Bottom line Schedule C (net income + depreciation and depletion) and minus line 21 on Schedule A. Get the Schedule C as high as you can and line 21 as low as you can. If you file a 2106, that gets factored in, too (as a minus, but not if already included in line 21. Not sure where else it would be, but it's an expense form. I am saying don't double count it if it is already in one of the areas I mentioned).
But please! Consult your tax professional and mortgage lender BEFORE you file those returns. Amended returns and mortgages don't mix well, so get the taxes right before you formally apply.....also, I made some assumptions on how you are filing, so if none of this makes sense.....In the words of Rosanne Rosannadanna, "never mind."
Thanks Smartmoney, I think the light is beginning to dawn. Is it fair to say that the deductions/expenses that figure on Schedule C are the ones that the bank will take into account (plus line 21 of Sch. A) - ie. NOT add back into adjusted gross income? And not the ones in Lines 23-35 of main 1040 form - ie. they WOULD add those back into AGI? That would seem logical as the latter are not related to the generation of business income (Sch. C). And moving expenses will go on line 26 of 1040, not on Sch. C.
FYI, I'm not filing Sch A. And I'm not using a tax professional (sharp intake of breath - my freelancing business is pretty simple in nature, not far off being an employee). In terms of consulting my mortgage lender, I've consulted two, who both were unable to give me a straight answer. Problem is the guy on the home loan desk is not the guy who makes this kind of detailed decision - that's the underwriter. And I can't speak to the underwriters directly. So all I've got are a couple of customer service guys' opinions. And in my experience, knowledgeable forum participants will often have better-founded opinions...
So your response to my query just above would be much appreciated.
I just found the following guidelines for FNMA (?) applications, which are extremely useful. They seem to indicate that what I suggested in my last post is correct. Any further clarifications very welcome!
The reason why he can't help you is due to experience level. No one will put you in direct contact with an underwriter (they are to be anonymous).
Quite simple Schedule C net + depreciation and depletion. I cannot ever recall seeing a move put on schedule C (and really recommend you check and double check w an accountant - schedule C deducting a move for work sounds like an audit red flag....If you worked for IBM and received promotion, yes, but there's a schedule for that and it wouldn't be on C).
What kind of business do you have? The other challenge you have is showing how your successful business in Anytown will be the same inTimbuktu. For example, a service business such as a piano teacher could not document their income could continue in a new location. However, a technical writer that proofs manuscripts would not have any issue, but they would have an issue documenting why the move was necessary for a tax deduction. Your mortgage lender doesn't communicate with the IRS, but we hear back from clients all the time why they were audited.
Hi, SmartMoney, a belated thanks for the feedback. I'm pretty clear now that the only exemptions/deductions that are relevant for mortgage applications are the ones on Schedule C (NOT the ones on Form 1040), as you indicate.
Just to clarify, I'll be including the costs of my move on Form 1040, Line 26, not on Schedule C. According to Publication 521, the self-employed are also entitled to deduct moving costs - there is no reference to the need to prove that the move was necessary for work purposes. One simply has to comply with time (of self/employment subsequent to move) and distance requirements.
Appreciate all the help given!
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
