When tax time comes around, we get a ton of self-employed mortgage questions regarding how different scenarios impact getting approved for a loan. One of the most common involves the mileage deduction and how it affects your mortgage pre-approval.
Please consult a tax professional with tax preparation questions.
Automobiles used for business purposes have an option to deduct expenses based on actual business miles driven. This can reduce your taxable income — but it also reduces your qualifying income for a mortgage, which affects how much you can borrow.
There is, however, a way to get some income added back for your home loan approval.
The 2017 mileage deduction rate is 53.5 cents per mile. Part of the amount-per-mile deduction is allocated for depreciation, which is an accounting loss but not a cash-flow loss. When analyzing business income, well-versed lenders, especially those experienced with self-employed homebuyers, understand this and will add back the expenses taken for depreciation to the bottom line, allowing for more qualifying income than the profit shown on the tax return for your mortgage loan application.
See why understanding this second layer of business mileage is important? More qualifying income means a possible loan approval for a higher amount.
According to the IRS, 25 cents of each 53.5 cent-per-mile deduction is allocated to depreciation. Let’s apply these numbers.
A client who deducted 10,000 business miles on a tax return would show a $5,350 expense (10,000 x 53.5 cents). We would add back the portion allocated to depreciation to the profit of the business in the amount of $2,500 (10,000 x 25 cents).
This article is only intended to explain how the results apply to mortgage lending from an income-calculation perspective and should not be used for tax-filing purposes.
If you have questions about how self-employed income or tax returns affect home loan pre-approval, call our team at Florida Mortgage Firm at 813-707-6200 or read our blog post, How Self-Employed Income Affects Getting a Mortgage.
Florida Mortgage Firm is an Equal Housing Lender, NMLS #289323 | NMLS #294701
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