What Self Employed people need to know about tax time.
April 12, 2022
Are you self employed?
Here are some important tips for self employed individuals when it comes to reporting income, your taxes and your mortgage qualifications. Make sure you know what to do before its too late!
Here’s what Self-Employed home buyers need to know:
- Many self-employed individuals are motivated to write off some of their earnings through legitimate expenses and personal deductions to reduce the amount of taxes due. It is important to report enough Line 150 income to qualify for the debts you currently have and plan on getting in the future.
- Lenders will refer to the income stated on Line 150 of your tax return. They may not consider the fact that you grossed $225,000 per year but wrote it down to $25,000. If you reported income of $25,000, the lender usually assumes your income is $25,000 and that you can afford a mortgage that a $25,000 income could carry.
- If you have enough line 150 income for the past two years, then you qualify for about five times your Line 150 income. Lenders will average your income over a 2-year period and will be looking for your income to be steady or increasing over the 2 years. If your income is going down, the lower line 150 income will apply.
- If you are a sole Proprietor some lenders will let us gross up your line 150 income by 15%. If you are incorporated its just claimed income on line 150.
- It is recommended that you work with professionals. You may want to hire a qualified bookkeeper and a Chartered Professional Accountant (CPA). Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
- You need to keep all your financial affairs up to date. That means getting the accountant prepared financials, filing your annual tax returns and most importantly paying your taxes. Lenders won’t lend you money if you haven’t paid your income taxes.
- To increase your borrowing power, two years before you plan to purchase, refinance or renew your mortgage, you may choose to reduce some write-offs resulting in a higher reported income. The result is that you will pay more personal income tax however this will ensure that you qualify for a higher mortgage amount.
- Get your finances in order. Pay down your debt!!
Every $400/month in loan payments lowers your mortgage eligibility by $100,000
Every $12,000 in credit card debt lowers your mortgage eligibility by $100,000
Do you see a theme here? Pay down your debt! Resist buying/leasing a new vehicle or taking on any additional debt prior to buying your home.
Buying a home in todays market can be challenging. Feel free to contact me to discuss your own unique situation. 604-315-3283 [email protected]