Yes, mortgage lenders typically add back most forms of depreciation when calculating qualifying income for self-employed borrowers. This includes vehicle depreciation (either through the standard mileage rate or actual expenses method), equipment/machinery depreciation, and sometimes even a portion of home office deductions. The concept is that depreciation is a "paper expense" that reduces your taxable income but doesn't actually reduce your cash flow in the current year. Lenders are trying to determine your actual ability to make monthly payments, so they focus on cash flow rather than taxable income. That's why most loan guidelines allow underwriters to add these expenses back.

This is really helpful advice, especially about working with a mortgage broker who specializes in self-employed borrowers. I'm just starting out as a freelancer and haven't bought a house yet, but I'm already worried about how my irregular income and business deductions will look to lenders. Do you have any recommendations for how to prepare for the mortgage process early on? Like, should I be keeping different records than what I normally would for just tax purposes? And how far in advance should I start working with a specialized broker - is it something you do months before you're ready to buy, or just when you find a house you want? I feel like there's so much conflicting advice out there about self-employment and mortgages, and stories like the original post make me nervous about making mistakes.

I should caution that just because you haven't been audited doesn't necessarily mean your position is correct. The IRS audits less than 1% of returns, so many questionable positions go unchallenged simply due to limited resources. Your approach is definitely on the aggressive end of tax positions. If you were audited, you would need to demonstrate that your rental activities rise to the level of a Section 162 trade or business, which typically requires regular, continuous, and substantial activity. Documentation of your time and activities would be essential, as would proving you're not just performing typical landlord duties but actually operating a business. Not saying you're wrong - just that there's significant risk in this approach without solid documentation.

Great question about record keeping! I've been tracking my rental activities for the past few years in anticipation of potentially expanding my portfolio. Here's what I document: 1. Time logs for all rental-related activities (showing for tenant, property maintenance coordination, bookkeeping, etc.) 2. Detailed records of any improvements or repairs I personally handle 3. Documentation of tenant screening processes and time spent 4. Records of property marketing efforts and time invested 5. Mileage logs for property visits 6. Correspondence with tenants, contractors, and service providers I use a simple spreadsheet with date, activity description, time spent, and any related expenses. Even though I probably don't hit the 250-hour threshold yet, having this documentation could be valuable if I add more properties or increase my involvement level. Regarding audits - I haven't personally been through one for QBI/rental issues, but from what I understand, the IRS would focus heavily on proving the "regular, continuous, and substantial" business activity standard. Time logs and contemporaneous records would be crucial evidence. The key is treating it like a real business from day one, even if you don't initially qualify for QBI treatment.

I had to paper file when this happened to me. The e-file systems get confused when you have 1042S withholding but are filing as a resident alien on Form 1040. I mailed my return with a copy of my 1042S attached and got my refund after about 10 weeks.

I actually managed to e-file successfully after running into the same rejection issue! The trick was to make sure I didn't check any boxes indicating nonresident status in my tax software. In FreeTaxUSA, there's a section about foreign income/status - I had to explicitly select "No" to all the nonresident alien questions even though I had a 1042S form. Also, when entering the 1042S withholding, I labeled it as "Federal income tax withheld from Forms 1099, 1042S, etc." rather than trying to categorize it as nonresident withholding. The system accepted it on the second try and I got my refund in about 3 weeks via direct deposit.

This is really helpful! I'm in a similar situation where my university issued me a 1042S even though I should be filing as a resident. One question - when you say "most or all of the taxes they incorrectly withheld," what rate were they likely withholding at? My 1042S shows they withheld about 30% which seems way too high for what I should actually owe on fellowship income. Also, did you have any issues with the IRS questioning why you had a 1042S but were filing as a resident? I'm worried about triggering an audit or having to explain the university's mistake.

Yes, 30% is the standard withholding rate for nonresident aliens, so that's definitely way too high for your situation as a resident! As a resident alien, you'd typically pay regular income tax rates on fellowship income (probably somewhere in the 10-22% range depending on your total income), so you should get a significant refund. I didn't have any issues with the IRS questioning the mixed forms. From what I understand, universities make this mistake fairly often with international students, so the IRS sees it regularly. I filed my return normally and got my refund without any additional correspondence. Just make sure you're clearly filing as a resident (Form 1040, not 1040NR) and that should signal to them that you know your correct status. The key is being consistent - file as a resident, report all your income including the fellowship money, and claim credit for all the withholding. The IRS computers are pretty good at matching things up automatically.

Good point! I paid a business broker about $15k to help find a buyer and handle the paperwork. I'm guessing I can deduct that from the sale price before calculating my gain?

Yes, that $15k commission to the business broker absolutely reduces your gain! You'd subtract it from the $325k sale price before calculating your gain. So instead of a $245k gain, you're looking at a $230k gain. That should save you several thousand in taxes. Also track any other expenses directly related to the sale - legal fees, appraisal costs, even travel if you had to meet with potential buyers. Every dollar in selling expenses is a dollar less in taxable gain.

Great question about timing! From what I've learned lurking here, the timing can definitely matter for tax planning. If you complete the sale early in the tax year, you have more time to implement offsetting strategies like maximizing retirement contributions, harvesting investment losses, or making charitable donations before December 31st. However, you also want to consider your overall income for the year. If you're having a particularly high-income year already, it might make sense to push the sale to the following year if possible. As for tax professionals, given the complexity of depreciation recapture and the significant dollar amounts involved, I'd definitely recommend getting professional help. The cost of a good tax advisor will likely be a tiny fraction of what you could save (or lose) by getting the calculations wrong. Equipment sales involve some really specific rules that general tax software might not handle perfectly.