Top Tax Lessons for New Business Owners Ready to Buy a House

I want to talk today about something that's affecting so many people right now, which is IRS tax debt. And one of the reasons it affects so many people is we all have our side hustles right now. Hey guys, Jim Duffy with Alcova Mortgage. And welcome back to the expert network.

Many people have started a business, have grown their business, and thankfully become very successful in it. But with that comes a new reality for a lot of people, which is going from a W2 employee position to being a business owner of some sort.

And a lot of times what gets lost in the translation until it's too late is you got to set aside a bunch for the IRS. And so I've run across a lot of self-employed people lately who have IRS tax debt. They want to buy a house and they're wondering, can I even buy a house with an IRS tax debt? I don't know.

And the simple answer is yes, but you have to do one of two things. The first thing you have to do is talk to the IRS and work something out. Many people have done this already, but if you haven't, that's your first step. So you work out either paying it off in full, in which case we can buy right away, or getting on a payment plan with the IRS.

Now, the first case is preferable, right? Because you get rid of the debt, if you can do that. And the ideal thing is if you're buying a house right away, we put it on the settlement statement at closing on the closing disclosure at closing. And just like it's a closing cost. We'll get the statement from the IRS of how much you owe.

We'll put it on the settlement statement if you want to close right away. So we don't have to then wait for the IRS to confirm that IRS debt is paid in full. We know it is because we have the payoff, we included on your settlement statement, we collected at closing. It's done.

The other way takes a little bit longer, but it's highly doable. So the other way is you make a payment plan with the IRS, right? Many people do this and there's nothing wrong with that. You're paying them back, they agree to a payment plan, so they agree in writing. Then you have to make three consecutive payments. Here's what gets a lot of people: they're like, can I just make three payments this month and close on my house later on this month?

The answer is no. We want to see that you're making the payments and that you're paying as agreed. And you agreed every single month on the 16th of the month or the first or whatever your agreement is, you are making those payments on time. That's really what a lender wants to see. So yes, it's going to delay closing on your home or delay your purchase of a home by three months.

So oftentimes I have self-employed buyers who they have the payment arrangement made, they start shopping for a home after first or second payment is made, they make the third payment. And several days later, two or three days later, we're closing on the sale of their home, on the purchase of that home. So it all just has to happen in order.

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The other thing to take into account is if you make a payment arrangement with the IRS, whatever that payment is, obviously we're going to count that in your debt ratio as well. So it might affect how much home you qualify for. So if you want to qualify for more home, just pay the debt off in full. There's no monthly payment. There's nothing included in your debt ratio.

But if you can't do that or don't want to right now, that's okay too. But if your payment is say $300 a month, your arrangement with the IRS, we're going to count that 300 in your debt ratio. And that will affect how much home you qualify for.

I hope that helps. If we can help you and you're self-employed, we do a lot of self-employed loans and that's fine. We can walk you through it and help you into your home.