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Can you or can't you use Capital Gains as recurring cashflow to qualify your borrower for a loan?

Once again, I sense you are looking for a definitive answer. And it is….(wait for it)…it depends.

When it makes sense to use Capital Gains as recurring cashflow:

  • The borrower is receiving payments on an installment sale.
    • This is reported on the Form 6252 and then comes through Schedule D (or perhaps Form 4797) on it’s way to the front page of the 1040 if this is a personal return.
    • On page one it may look like any other Capital Gain and you may mistakenly ignore it.
    • Find out how much the borrower is receiving and for how much longer. Then decide.
  • The borrower has more than several years of consistent cashflow from capital gains
    • Typically this will be either someone who is retired, who is independently wealthy or who is a developer/real estate investor.
    • You will not be able to tell from the Schedule D what their cashflow actually is. Require a broker’s statement for stock transactions and the closing statement for real estate.
    • Remember, the tax return only shows what was sold. If you want the entire picture, consider buys and sells

When it doesn’t make sense to use Capital Gains as recurring cashflow:

  • The borrower only shows capital gains periodically.
  • The borrower shows no capital gains in the most recent year or years.
  • Your guidelines just don’t let you do it!

I have a problem with a hard and fast rule that you can’t use Capital Gains. What if you have a retired borrower who was very conservative and well-diversified. They already have recovered many of the losses they might have suffered during the recession.

Yes, we are lending on asset conversion instead of new income. But if a retired person did it right, heck, they are living on asset conversion. That is what drawing from pensions and IRAs – and selling down their portfolio – is.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.