Wednesday, August 7, 2013

How to Calculate Self-Employed and Rental Income

We get many calls from consumers and real estate agents asking how to calculate self-employment income or rental income.  It can seem complicated, but it's really a pretty easy calculation if you do it step by step.  Here's how it's done:
  • Take your net self-empoyment income or rental income that you reported on your tax returns.  Your net income is the number after you subtract all of your expenses.  Sometimes, this number may be a negative number because your expenses were more than your revenue.
  • Add back in any amounts you counted as expenses for depreciation, depletion, or business use of your home.
  • Subtract any amount you counted as an expense for meals and entertainment. 
  • The result is how much you can count as income for that year to qualify for a mortgage.  HOWEVER, you must also average self-employed or rental income over the past two years.  Figure it out for both years, add the income for both years, and divide by 2.
  • The only thing that makes this complicated is that if your income decreased from one year to the next, you do NOT get to average the two years.  You have to count the most recent year's income - the lower income. 
  • Depending on how much your income dropped from one year to the next, the lender may require you to provide proof that your income has either stabilized or is increasing in the current year.  Typically, the proof they require is a Profit and Loss (P&L) statement and a Balance Sheet for the current year.
If you have any questions regarding self-employment or rental income, just give us a call. 


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