What Impact Will Reducing My Taxes Have on Getting a Loan?

You want to minimize your taxes but you’re also planning on seeking mortgage financing to purchase a home or refinance an existing one. And you’ve heard that you can’t do both. Well, these two objectives are certainly on different ends of the spectrum and will take some planning to accomplish but it is possible to achieve both in the end.

The lower your Adjusted Gross Income (“AGI”), the lower your tax will be. Most taxpayers don’t take advantage of many of the deductions to which they’re entitled. Once your tax professional helps you structure your finances and capitalize on these opportunities, your AGI will be lower. Probably much lower. And as a result, your taxes will also be lowered.

Mortgage lenders often use the AGI from your last two year’s tax returns as part of the loan qualification process and the higher the AGI, the easier it is to qualify. If your AGI is too low you won’t be able to qualify at all. There are certain “add back” deductions like depreciation and passive losses that serve to reduce your AGI but don’t count against you for loan qualification purposes. But otherwise, the higher your AGI the better when you’re qualifying for a loan.

If you’re planning on applying for mortgage financing, you’ll want to make sure your tax professional is aware of your plans. You may also want to consider what level of income the lender may be looking for and make sure both the amount and the general timing are things you and your tax professional discuss. Some lenders recommend disregarding certain deductions during the tax year preceding the one where you plan to apply. Once you’ve applied for the loan then you can go back and amend your prior year taxes with all the possible deductions. If you’ve already filed your return, it might also make sense to amend your return and eliminate some deductions. Then re-file afterwards to reduce the tax liability to its proper level.

It is possible to balance these two opposing objectives (reduce taxes and increase AGI) but it takes planning that is best done in advance. And it will likely involve some filing and refilling of tax returns in order to realize the benefits of tax planning while qualifying for mortgage financing.

By: Evan A. Nielsen, Esq. (Licensed in California)

Contact us today to schedule your free tax consultation at (480) 888-7111.