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If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using This policy may be applied to refinances of a subject rental property or to other rental properties owned by the borrower. In some situations, the lender’s analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. In order for the lender to determine qualifying rental income, the lender must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. Reconciling Partial or No Rental History on Tax Returns If there is a lease on the property that is being transferred to the borrower, see B2-1.5-03, Legal Requirements B7-2-05, Title Exceptions and Impediments, for additional information.įorm 1007 or Form 1025, as applicable, and copies of the current lease agreement(s). If the property is not currently rented or if the existing lease is not being transferred to the borrower, then lease agreements are not required and Form 1007 or Form 1025 may be used. The borrower’s most recent year of signed federal income tax returns, including Schedule 1 and Schedule E, orĬopies of the current lease agreement(s) if the borrower can document a qualifying exception (see Reconciling Partial or No Rental History on Tax Returns below).įorm 1007 or Form 1025, as applicable, and copies of the current lease agreement(s) if transferred to the borrower. When the subject property will generate rental income and it is used for qualifying purposes, one of the following Fannie Mae forms must be used to support the income-earning potential of the property:įor one-unit properties: Single-Family Comparable Rent Schedule ( Form 1007) (provided in conjunction with the applicable appraisal report), orįor two- to four-unit properties: Small Residential Income Property Appraisal Report ( Form 1025).ĭoes the Borrower Have a History of Receiving Rental Income From the Subject Property?įorm 1007 or Form 1025, as applicable, and either Transactions where rental income is being used to qualify for any property placed in service in the current calendar year, for example, when converting a principal residence to an investment property. Refinance transactions for a property that experienced significant rental interruptions causing income to not be reported on the most recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income) and Refinance transactions where the borrower purchased the rental property during or subsequent to the last tax return filing Purchase transactions where there is an existing lease on the property that will transfer to the borrower Examples of scenarios that justify the use of a lease agreement are If the borrower does not have a history of renting the property or if, in certain cases, the tax returns do not accurately reflect the ongoing income and expenses of the property, the lender may be justified in using a fully executed current lease agreement. If a borrower has a history of renting the subject or another property, generally the rental income will be reported on IRS Form 1040, Schedule E of the borrower’s personal tax returns or on Rental Real Estate Income and Expenses of a Partnership or an S Corporation form (IRS Form 8825) of a business tax return.
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General Requirements for Documenting Rental Income (Subject and Non-Subject Property)