Is Your Accountant Keeping You from Making a Great Investment?

Perhaps a little less creativity would help.

Photo by Phil Hearing on Unsplash

I was talking to a relative who owns a business. He said that he has so many write-offs that he pays no taxes. He wants to buy property in a few years.

I told him about a friend of mine. She was quite proud of her accountant for finding so many write-offs for her that she paid little if any income tax. The problem was that she could not qualify for a home loan because she had no income.

Banks typically look for two years of stable monthly income. They love what are called W2 employees. Those are people who get pay checks and their incomes are reported on W2s at the end of the year. People who have had the same job for two years, are considered stable and a low risk for defaulting on a loan.

In addition to the stable monthly income, banks look at how much income and debt people have. Often banks want the monthly debt payment to be less than half the monthly income. The debt payment includes car payments, credit cards, student loans and your future mortgage payment. When you are thinking about getting a mortgage, consider paying taxes for two years. Pay off all other debt.

Using a mortgage calculator, I put in $400,000 for the price of the home, zero down, 15-year mortgage, 5% interest rate and excellent credit score. The monthly payment is $3163. If you had no other debt and the bank required your income to be double your monthly payment, you would need an income of $6326. If other factors remain the same and the home price changed to $500,000, the monthly payment is $3954. The necessary monthly income would be $7908. If you make $1582 more per month, you qualify for a $500,000 home instead of just a $400,000 home.

Imagine you had an income of $7908 per month and your credit card and car payments were $791. You add the $791 to $3163 (the monthly payment for a $400,000 house) and you still qualify for the $400,000 home. Pay off your other debt to eliminate the $791 payment and you can afford the $500,000 home without increasing your income.

Perhaps your accountant could be a little less creative and increase your income from $6326 to $7908. Your yearly income would go up by $18,984. If you are in the 35% tax bracket, that is an additional $6,644 in income tax.  Is it worth $6,644 per year to be able to afford a home worth $100,000 more? Consider that a home might increase in value by 10% per year.

Perhaps your great accountant is keeping you from making a great real estate investment. Think it through.