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.