Taxes, Self Employed and Buying a Home (edited 12/21/07)
Its almost that time of year again. TAX SEASON! Just after the Ho Ho Ho’s are done, for many people its the Woe Woe Woe’s of tax time. This is especially a crazy time for the self employed. Most business owners take advantage of all kinds of write-offs and tax breaks to eliminate most, if not all of their tax liablility. While that is awesome, it may not be the right move!
If you are thinking of buying a home this next year, be careful with your taxes. Just because you grossed $250,000 last year does not mean you get to use that for your income level. Lenders are not looking at your gross sales. They are looking at your net taxable income on your Schedule C. For many people this could be a problem.
Many business owners pay a professional to handle their taxes. These professionals have one goal in mind… to bring your net taxable income as low as possible so that your tax liability is small. But this also will affect any income that you can use to qualify for a home (or any other loan.) And with lender’s tightening up their loan programs, the old “stated” income deals are hard to find!
Here is a real life scenario I just went through…
A business owner filed taxes last year with gross income revenues of over $250,000! He had a fantastic year! He also had a fantastic accountant that was able to get his taxable income down to $2,500.00. Yeah, that’s right… $2,500.00. But even if it was $25,000, he would have had the same problem…. This year when he decided to buy his family a home, the lender is qualifying him off the NET income of $2,500! That means with no other debt at all, he could afford a house payment of roughly $75 a month. Oh, that also includes taxes and insurance. Not much home huh?
Lenders are figuring that if you are able to write off these expenses, then you are not holding that as cash. They can only go by your net income… and that is what you pay taxes on.
So what do you do? Either pay lots of taxes or keep renting? NEITHER! You can have the best of both worlds IF you know how to do it…
This year when you file your taxes, have your accountant show as much income as possible on the Schedule C. Yes, I know, that means you have taxes due… don’t worry about that right now. You have until April 15th to pay anything. Once you have FILED you taxes (and it does need to be filed) you can apply for a mortgage and be qualified on that income. Then GO FIND A HOME! Get started right away in finding the right home. Once you close on your home, have your accountant go back and AMMEND your tax returns, taking all the deductions you “forgot” to take the first time. Get this ammended return in by April 15th, and any check you may need to write Uncle Sam will be much less.
In doing this, you have achieved both goals… buying a home and reducing your tax bill.
ADDED 12/21/2007
I have recieved a few emails from folks concerned that this might be considered fraudulent. Please understand that I am not in any way promoting any type of fraudulent activity. However, we all know that when a good accountant is done with all the allowable write-offs that the IRS allows, the taxable income that a business owner may be left with is NOT the useable income they have lived off of for that past year. Majority of the time, the taxable income is dramatically less than what that individual actually used to live and pay bills. So using the Schedule C net income is not a totally accurate representation of a borrower’s income producing ability; however, it is the number lenders use to qualifying a self-employed borrower for a mortgage. So if you are self employed and plan to buy a home, I guess the best advice is to show your taxable income as what you actually lived off of last year when you first file, and then you can go back to ammend your taxes to take advantage of the additional items the IRS allows you to write off. Self employed individuals take the most risks in life and we all benefit from that. They should also be given the most opportunity as well. Is it working the system? I guess it is… but in my humble opinion, it is no different than what the accountant can work the system for in finding additional writeoffs.
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This is just one of the many creative solutions you will find when you work with a professional in the mortgage industry. If you are thinking about buying a home, you really need to work with those that know the in’s and out’s of the business. To get pre-approved, contact the Carolina Mortgage Connection at 877-411-9327 or apply online to pre-qualify.