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C-Corps. – The good, the bad and the ugly when you apply for a home loan

Updated: Jun 3, 2019

If you own less than 100% of your business, filing your taxes as a C-Corp. rather than electing an S-Corp. may hurt your ability to get a home loan.

Here is what you need to know about how lenders calculate your income for C-Corps., so you and your tax professional can consider these factors when determining your tax structure.

Lenders allow you to use your W-2 income to qualify, whether you elect C or S. If you elect C, they only allow you to use the Earnings if you own 100% of the corporation; but they will deduct your percent ownership if the corporation reports a loss and you own 25% or more.

Here is an example. You and three friends open a business. Each of you owns 25%. You each draw a W-2 salary of $75,000 and company profits are $100,000 for each of the last two years.

  • If you structure it as a C-Corp., each of you can only use $75,000 to qualify for a home loan, because you own less than 100%; so, you cannot use your percent the company profits to qualify

  • If you structure it as an S-Corp., each of you can use $75,000 + 25% of the $100,000 profit = $100,000 to qualify. The profit will show up as K-1 income on Schedule E of your personal tax return form 1040 and is used to qualify you for the loan (assuming the K-1 reports Distributions. Please see the article on S-Corps. and Partnerships for more information)

Here is a similar example, but the corporation is reporting losses of $100,000 each of the last two years, instead of profits.

  • If you structure it as a C-Corp., each of you can use $75,000 minus 25% of the losses to qualify for a home loan. Your income for lending purposes is $75,000 minus $25,000 = $50,000

  • If you structure it as an S-Corp., each of you can use $75,000 minus the losses of $25,000 on your K-1 to qualify. This also equals $50,000.

The calculation is the same for both structures if there is a loss, but it is not the same if you report profits.

A C-Corp. offers the same income if there are losses; but does not let you benefit from profits unless you own 100%.

When I asked the best accountants I know why they recommend a C-Corp. over an S-Corp. for some self-employed clients, the answer is that C-Corps. can write off all health care expenses, and S-Corps. have limits. If you do not have high healthcare costs and your accountant recommends a C-Corp., I recommend you discuss the pros and cons of a C-Corp. and include the limitations on lending in your decision if you plan to buy or refinance using those tax returns to qualify.

If it doesn’t help you from a tax standpoint, and it hurts you from a lending standpoint, then why elect C-Corp.?

If you decide to elect S-Corp., my website has an article that describes how lenders evaluate those tax returns and what you can do to support your ability to qualify for a home loan.

If you have questions or want help assessing your situation, you can contact me at 877-728-2008;

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