The Hidden Cost of Tax Write-Offs: What You Need to Know Before Filing Your Taxes If You Want to Buy a Home

Here’s the reality…

Whether you're self-employed, a real estate investor, or a W-2 employee looking to maximize your tax deductions, there's something crucial you need to understand – how your tax strategy could impact your ability to qualify for a mortgage.

While I'm all about helping people save money through strategic tax planning, there's an important balance to strike when you're planning to purchase real estate.

Let’s Break This Down with Some Real Examples:

For Business Owners: Let's say you're making $200,000 in revenue. Through strategic tax write-offs, you might reduce your taxable income to $50,000. However, when you apply for a mortgage, lenders will look at your taxable income to determine how much you can borrow.

For W-2 Employees: If you have a side hustle or rental properties, similar principles apply. Those extra deductions and write-offs might save you money during tax season, but they could limit your borrowing power.

How This Impacts Your Borrowing Power:

• With $200,000 shown as income: You might qualify for a $600,000+ mortgage

• With $50,000 shown as income, Your mortgage qualification might drop to $150,000 or less

Frequently Asked Questions:

Q: "What if I'm planning to buy a home in the next year – should I change how I file my taxes?"

A: If you're planning to purchase property within the next 12-24 months, consider consulting both a mortgage lender AND your tax professional before filing. They can help you find the right balance between tax savings and qualifying income.

Q: "Do lenders look at my gross income or my taxable income?"

A: Lenders typically look at your taxable income. However, they may also consider:

• Base salary

• Overtime and bonuses (with a 2-year history)

• Commission income

• Rental income (if you can document it)

• Side business income

Q: "What's considered a good debt-to-income ratio?"

A: Aim to keep your DTI below 45%. Here's how to calculate it: Monthly Debt Payments ÷ Monthly Taxable Income = DTI (Remember: This includes your potential mortgage payment!)

Q: "Can my spouse's income help if my taxable income is low?"

A: Yes! If you're applying jointly, lenders will consider both incomes. However, both parties' credit scores and debts will also factor into the equation.

Q: "What if I've already filed my taxes but want to buy a home?"

A: Lenders typically look at a two-year average of your tax returns. If you've already filed this year, focus on strategic planning for next year's taxes and consider:

• Working with a mortgage lender now to understand your current qualifying amount

• Creating a plan to optimize next year's tax return if needed

• Exploring other options like larger down payments or co-borrowers

Smart Strategies for Future Home Buyers:

Plan Ahead

• Start working with a mortgage lender 1-2 years before you plan to buy

• Understand which deductions impact your qualifying income

• Create a strategic plan that balances tax savings with borrowing power

  Document Everything

• Keep detailed records of all income sources

• Save bank statements showing regular deposits

• Maintain good documentation of rental income if applicable

  Consider Timing

• Think about when you'll need to qualify for a mortgage

• Plan major tax write-offs around your home-buying timeline

• Consider spreading larger deductions across multiple tax years

Pro Tip: Remember that minimizing your taxable income might save you money now, but it could prevent you from building long-term wealth through real estate investment!

Ready to create a tax strategy that supports your long-term wealth-building goals? My Tax Strategy Bundle walks you through all the opportunities while considering your bigger financial picture – including future real estate purchases!

XO, Jen

Disclaimer: This blog post is for informational purposes only and does not constitute tax or mortgage advice. Please consult with qualified tax and lending professionals for advice specific to your situation.

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