Treatment of rental income

jamesbugmanNovember 3, 2008

We are looking at purchasing a new home and renting out the old home.

I know that the new rules state that I need 70% equity in the old house in order to use 75% of the rental income to offset the mortgage. I can't find a clear answer on exactly what "offset" means

Does offset mean that the income is taken directly from the mortgage and I only have to qualify for any shortage. For example if rent is $1000, PITI is $1000, I would only have to add $250 to the "other debt" column to determine eligibility?

Or does offset mean $750 counts as "other income" and $1000 goes in the "other debt" column. After the ratios are calculated, that takes a pretty big chunk out of the qualification amount.

I've seen it listed both ways on the internet.

Thanks in advance for any response


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Talk to you tax advisor. Rentals are different everywhere. When we had a rental, I kept track of everything because we could not declare it as rental property unless we actually managed the property. But be aware of the amount of time you must keep the rental, and if and when you sell it the capital gains tax you might have to pay. Please, contact a CPA/tax advisor for your own protection. Another thing, ask them if you need to get a current value (appraisal) or when you sell it you will pay capital gains tax big times!!! I know from experience.

    Bookmark   November 4, 2008 at 5:27PM
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Quicken has a good program for keeping track of rentals.

    Bookmark   November 4, 2008 at 5:29PM
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I'll definitely talk to someone about tax treatment, especially with the resent changes to the homeowner exemption rules. Thanks for the tip on Quicken, I'll check that out.

Assuming that I have 70% equity and a rental agreement/deposit in place, how does the rental income get treated for qualifying for a mortgage? Does it just count as ordinary income?

    Bookmark   November 5, 2008 at 2:23PM
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I'm not sure what lenders are doing today. However, when I have qualified for a mortgage with rental income, I believe that they used 75% of the lease amount as income and included all of the PIT&I expenses. At no point did my equity % in the rental come into question. However, things may have changed.

    Bookmark   November 5, 2008 at 3:39PM
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We purchased a tri-plex recently. The income from the rental house we already had went in the minus column because the rent didn't quite cover the mortgage, but when we bought a 2nd triplex a month later, 100% of the profit went in the positive column, helping us to qualify for the mortgage. I was really quite amazed that it was so easy to get a loan. This was just this last September We had about 25% equity in each property.

    Bookmark   November 5, 2008 at 8:01PM
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James is talking about qqualifying for a new mortgage when you are keeping an existing home and will now be renting it out.

Offset means ... if the market rent will be $1000 a month, you can use 75% or $750 of that and then subtract the mortgage payment (PITI and any HOA fees)on that house. If the end figure is a negative figure, that will count as a debt. If the end figure is positive, they might use it as income.

In the end though, you will not have to qualify with 2 full mortgage payments.

    Bookmark   November 6, 2008 at 12:51PM
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As Pam had indicated the bank will use 75% of the rental income plus 9% average vacancy to qualify for a mortgage. Turbotax does a wonderful job with Schedule E, Rents and Royalties, which is conveniently located above agi on your 1040.

    Bookmark   November 8, 2008 at 1:23AM
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Thanks Pam, that's exactly what I was looking for.

I've used TaxCut in the past, I'll have to see if it has the rental forms or if I will have to start using TurboTax in the future.

    Bookmark   November 10, 2008 at 11:18AM
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