Last week I mentioned talking to a mortgage lender and the long wait time for a transcript of your tax return from the IRS. During that same conversation she mentioned an issue one of her client’s was having. They had put the income and expenses from their rentals on a Schedule C. The mortgage lender needed the information on a Schedule E. For those of you out there who don’t know a Schedule C is where you report business income and a Schedule E is where you report rental income. So one would think her client had put the information on the wrong form. But the IRS tells us that if a rental is owned by a husband and wife together and they have not formed an LLC then half of the income and expense is to be reported on the husband’s Schedule C and the other half on the wife’s Schedule C. Yes, the IRS wants husbands and wives to report rental income and expenses on a Schedule C. It makes no sense and yet that is how the regulations are written. This poor woman had reported her rental income correctly for the IRS but the mortgage company would not give her a loan until she had amended her return with the rental information on the Schedule E and then wait 8 to 12 weeks for the transcript to arrive.
It seems to me that the mortgage lenders are going to have to get smarter about reading a tax return or the IRS is going to have to get smarter about writing less confusing rules.