Q: I own my own business. I received a 1099 for work that I did for another company but after deductions, my tax return shows that I only made $4,000 last year. Now I can’t get a mortgage. Is there some way around this?
A: If you own your own business and only paid yourself $4,000 last year, you might have a big problem if you’re trying to show you can afford a mortgage.
I’m hoping that you actually have more income coming in, but after tax deductions that don’t affect your cash flow, you have more money. That’s how it works in many industries, including real estate investment.
If you work in the real estate industry and have many investment rental properties and commercial buildings, you could find yourself with little income to show on your tax return. Real estate investors benefit from the ability to depreciate their buildings on a year to year basis and offset that depreciation against income produced from their properties.
If you have real estate properties that throw off good income and you earned quite a bit of money from these properties even after deducting expenses, your tax return might show that you have little income once you subtract property depreciation.
That said, a lender who is experienced in lending to business owners in your industry, should be able to look over your tax return and see through the line items to understand what your true cash flow is each year.
For example if your true income last year would have been $100,000 but due to tax benefits – not cash payments you made to others – you were able to reduce your income to $4,000, a lender may be willing to review your overall tax situation and still give you a loan.
But that lender may not offer you a loan on the same terms given to a person who has an easy tax return and falls into all of the normal standards lenders have come to expect from borrowers these days.
However, if your tax return shows that you only made $4,000 last year and the deductions you mentioned were cash outlays that reduced the money you actually have, you probably won’t find a lender willing to give you any loan for a home with that level of income.
I’m hoping you haven’t misjudged your business, and will be able to raise the level of income you earn so that homeownership can be a goal sooner rather than later.