Being self-employed is something many dream of but don’t realize the tax implications it holds. I am never going to hold you back from your entrepreneur dreams. I will actually encourage the hell out of you! Self-Employment is rewarding, scary, and everything in between. The real challenge is being able to qualify and buy a home while being self-employed.
It’s all about the taxable income! If you are even remotely thinking about buying a house within the next few years make sure your CPA is aware.
There are various types of self-employment/contract employee income and it can be shown on IRS forms Schedule C (Sole Proprietorship), 1065 (Partnership), 1120 (Corporation), and 1120S (S Corporation).
Standard requirement is the lender needs your 2 most recent years tax returns, although sometimes only 1 year is needed.
If you receive a K-1 and you have 25% or more ownership in the business, your lender will require business tax returns.
The lender will average the TAXABLE income. Very few expenses can be added back, but 100% of the depreciation can be.
Using funds from a business account has to be reviewed closely to ensure that taking the funds for personal use won’t negatively impact the business. If you have a business partner, this must be taken into consideration as well.
Pay your taxes and if you can’t, get on a payment plan. Because you can’t buy a house if you have an outstanding tax lien!
If you’re on a payment plan, lenders need a minimum of 3 consecutive months of payment before the borrower can close.
Save for your taxes!
Each time you get paid, take a percentage (determine that with your CPA) and put it aside. This way when your tax bill rolls in, you have the money to pay it!
Every situation is different. The oversimplified way to look at it is if you don’t pay taxes on the income, the government isn’t going to allow you to use it to qualify. They make the tax codes and they make the mortgage guidelines. What does that tell you?
If you’re thinking about buying a house and haven’t filed your taxes yet – speak with your local mortgage lender first! They can chat directly with your CPA, or give directions on how to file your taxes, to help you qualify for a mortgage.
Need to know more about being self-employed and buying a house? Let us connect you with our favorite local lenders!