Don't Let Your Side Busines Derail Your Real Estate Business

Your income tax returns say most everything about you, financially speaking. Your income, your dependents, your income tax deductions and finally how much tax you owe (or don’t). Running a business means collecting revenue, deducting watch those deductionsexpenses and pocketing the difference.

Oh, and it means project management, evaluation, hiring and firing, business taxes and a few other important items. Tax returns are also used by lenders when calculating the income of someone who is self-employed. And even evaluate returns for those who aren’t self-employed or at least don’t think they are.

For the active real estate investor, having the advice and guidance of an income tax professional is crucial. Not simply to prepare annual taxes but to help craft a business that takes advantage of all legitimate tax breaks to reduce the tax bite. Even for someone who isn’t considered self-employed, there can still be deductions for a side business. Sometimes the side business hurts rather than helps a borrower who is financing a potential real estate investment.

It’s common for someone who receives a pay check every other week from an employer to have a side business. Say a car detailing business or a consulting firm. Whatever the practice, the income and expenses are included as part of the individuals income tax filing. Considering write-offs, sometimes an individual takes advantage of too many deductions and the business loses money each year. Not much, but enough.

Say a couple make $90,000 each year at their jobs. The wife also has a side business she runs that makes specialty cupcakes and does rather well at it, considering it’s a part time effort. The business doesn’t really make any money but does pay the associated bills. In fact, last year the business lost $5,000.

When a lender evaluates a loan application for any property, investment or otherwise, that $5,000 seemingly innocuous loss will be deducted from qualifying income. Instead of making $90,000 per year, the couple makes $85,000. That’s okay if there’s still enough income to qualify for the purchase, but there are occasions when borrowers are surprised to learn the loss affects the ability to qualify for a rental property loan.