A CPA specializing in real estate is what every property investor should integrate into their tax strategy if they want to generate as much profit as possible. In fact, a good certified public accountant can help a landlord legally reduce their tax liability to zero. On top of this, an accountant takes care of all the basics for you, such as ensuring rules and regulations are followed, preparing and filing your taxes, as well as record keeping and financial planning.
If your interest has been sparked, dive into this article so you’ll know what to look for when searching for a CPA who has your back when it comes to reducing your tax burden. Let’s start with the essentials, which would be an accountant’s certifications, as well as the type of industry experience they have under their belt.
Qualifications of a CPA Specializing in Real Estate
First and foremost, you’ll want to ensure the CPA you hire to handle your affairs specializes in real estate. I say this because I’ve had conversations with fellow investors who shared horror stories of utilizing accountants with no real estate tax experience.
You see, a CPA who’s been in the business for years, specializing in real estate, will know the industry tax code inside and out. They’ll know what deductions are allowed and how building depreciation works, and they may also be able to handle throwing a cost segregation study into the mix.
They’ll also know how to deal with rehab projects when maximizing tax benefits and know what to do if an investor is purchasing a property in a different tax year than when it’s placed into service, and so on. In regard to cost segregations, if you plan on buying a new construction rental, you’ll want to become familiar with this tax strategy, so be sure to add this article to your reading list – The Power of a New Construction Cost Segregation Study Can Save You Thousands.
Certified Public Accountant vs General Accountant
I’ve been throwing around the terms CPA/certified public accountant and accountant interchangeably, as most do because they provide similar services. However, there are some differences, which include, as the name suggests, certification.
A CPA is required to pass certain state education and licensing requirements, as well as complete ongoing education. In many states, to gain CPA certification, an individual will have to complete 150 semester hours over what a general accountant would be required to complete. This pushes them up in the ranks and arms them with a higher education. As for the ongoing education requirements, being up-to-date is crucial, given the fact that real estate investment tax codes change frequently. Additionally, a CPA specializing in real estate is legally permitted to represent a real estate investor during the course of an IRS audit.
In contrast, general accountants will not have any licensing and ongoing education requirements. However, they will need a BA degree in certain fields, such as business or finance. The bottom line is that a CPA will have much more training and have the legal authority to assist with higher-level accounting issues. With that in mind, business-savvy landlords should make sure to only work with accountants for property investors, individuals who are actually certified CPAs, and those who have a substantial amount of experience taking on real estate investment clients.
As mentioned earlier, a good CPA specializing in real estate may be able to legally drive a landlord’s tax liability down to zero – check out my video on the topic to increase your knowledge base on the subject:
Services Offered by Accountants for Property Investors
A CPA who has experience with real estate can offer invaluable services to investors by handling their property-specific taxes and making sure they get the most deductions, all while following the law. CPAs also help track income and expenses so investors can plan better, give landlords advice on property depreciation to lower taxable income, and offer tips on how to set up a business that has the potential to grow. In the end, by managing finances and reducing risks, CPAs allow landlords to concentrate on building their portfolios and retain needed funds to invest.
Here’s a breakdown of the most common services you should expect from your CPA:
Tax Planning & Preparation:
Typically, a CPA’s main responsibility is to help clients reduce their tax obligations through smart planning strategies. This involves studying a client’s financial situation to uncover opportunities for minimizing taxes, which might include deductions, tax credits, and so on, all while keeping tax regulations in mind. CPAs compile, review, and organize financial records with the end goal of preparing accurate tax filings that can keep more money in their client’s pockets. Related to this, you’ll want to read up on tax shelters that CPAs utilize to lower the amount of money owed to the IRS – Tax Shelters for Real Estate Investors.
Bookkeeping Services & Financial Reporting:
An accountant should Keep accurate records so they’ll be on the ball with tax reporting. This not only helps with filing accurate taxes but also provides some insight for “next moves” or future investment decisions. Some tasks my CPA would take care of in regard to reporting would be to prepare detailed balance sheets, income statements which can be similar to a landlord statement, and a cash flow analysis report. When it comes to cash flow, if you’d like more details on the topic, head over to my article – The Basics Of Cash Flow.
Audit Support:
An audit can be an investor’s worst nightmare, but it doesn’t have to be this way if you have a good CPA specializing in real estate. An accountant who’s certified as a CPA can legally represent you when the IRS comes knocking at your door by preparing your documents and making sure all the necessary paperwork is handed over to the auditors. A CPA should also have the know-how to easily read audit findings so they can address any issues.
Forming an Entity:
Getting set up with the right entity, such as forming a limited liability company (LLC), can have a positive impact on a landlord’s tax burden and liability. Certified accountants can provide expert advice on selecting the best structure for your real estate business. They also help prepare and file the necessary paperwork, such as state registration documents and an operating agreement, while offering insights on managing finances and bookkeeping for the newly formed entity.
As for the liability aspect of an LLC, it’s well worth the time and money to set up this type of entity. This is because if a lawsuit were to occur, and the rental property was attached to your name as opposed to a corporation, your personal assets could be negatively impacted. If you’d like to form an entity, I suggest reaching out to Corporate Direct; they’re highly recommended.
Cost Segregation Analysis:
Working with an experienced CPA to conduct a new construction cost segregation study helps businesses analyze and classify assets in such a way where they can save a considerable amount of money from the start. In a study such as this, assets related to the property are placed in accelerated tax depreciation time frames of 5, 7, and 15 years. In contrast, if a cost segregation is not performed, then every element of the property would be lumped into a depreciation time frame of 27.5 years. Cost segregations are complex, so if you know one will be needed, it’s important to inquire about a potential CPA’s experience in this area.
Also, it’s worth noting that for qualified clients, Morris Invest includes a cost segregation study at no charge with each of our new construction properties. If you have questions about this or want to see if you qualify, feel free to contact Morris Invest.
Tips on How Landlords Should Evaluate and Select a CPA
Now that you realize how important it is to seek out an accountant who’s certified, and has extensive experience working with real estate investors, you’ll want to begin your search. To kickstart the process, I’ll provide some tips for selecting the best accountants for property investors so you’ll be on the right path.
The best way to begin is to ask fellow investors if they can recommend a CPA because there’s really nothing better than a good referral by someone who’s had an excellent experience. Once you have a few names on your list, I suggest doing your own due diligence by conducting an online search for reviews. When you have your preferred CPAs narrowed down, set up an appointment to meet them and have a set of questions in mind that will determine if this person, or firm, is on the same page you are when it comes to your financial and tax goals.
Questions to Ask a CPA Specializing in Real Estate
Here are a few questions I’ve asked accountants while interviewing them in the past. Also, make sure to brainstorm so you can come up with additional questions that pertain to your particular investing situation. To get ideas on what to ask, I recommend reading over my article – Rental Income Tax Guide for Real Estate Investors.
1. How long have you been a certified public accountant?
It’s important to hire someone who’s been in practice for a good number of years. This will ensure they have had the chance to run into various scenarios, making them better equipped to assist you no matter what your situation is.
2. What experience do you have working with real estate investors?
Understanding their background and familiarity with the real estate industry is crucial to gauging their expertise in handling property-specific tax laws and financial strategies. To determine their involvement in the real estate sector, find out if they are well versed in some of the basics such as 1031 exchanges and capital gains taxes. In the long run, an accountant who’s immersed in the real estate sector can increase an investor’s ROI and provide professional advice based on experience.
3. Can you assist with cost segregation studies?
Performing a cost segregation can be a powerful tool for accelerating depreciation and increasing cash flow, so it’s important to know if a potential CPA can easily take you through the process. For new construction properties, having a cost segregation completed will significantly decrease the amount of money you’ll be required to send off to the IRS. Here’s an additional article on the topic that you can bookmark for future reading – Is Performing a Cost Segregation Analysis Worth it?
4. How do you handle bookkeeping and tax preparation for real estate businesses?
Ask about their process for managing rental income and expenses for landlords. This will be the bulk of their job, so you’ll want to know if they have an organized and practical system in place.
5. What strategies do you recommend for minimizing tax liability for rental property owners?
Professional accountants for property investors should provide sound advice that’s specific to your investment strategies and goals. This question will give you a good idea of how much they know off the cuff regarding tax-saving strategies without leaning on research.
6. Can you help with structuring real estate deals involving partnerships or LLCs?
Structuring ownership and property deals correctly can have significant tax and legal implications. Because of this, legal documents should be crafted in such a way where you and your assets are protected. That said, it’s essential to understand their knowledge in this area. Additionally, when it comes to partnering with others on a real estate deal, there’s a lot to consider in regard to sorting out the taxes. If you’re going in on a piece of real estate with partners, you’ll want to head over to my article – How to Buy Property with Multiple Investors.
7. Do you have experience handling IRS audits for landlords?
When looking for a CPA specializing in real estate, you should make sure they have real-life experience with audits, instead of just offering you textbook knowledge. The reason for this is because property investments often have unique tax situations, deductions specific to real estate, and possible audit triggers that require knowledge of IRS tax codes. A CPA experienced in this area can feed you the information needed to make smart tax decisions, minimize risks during an audit, and make sure everything is on track with tax laws.
Before we come to a close, bookmark our power resources for future reading – you’ll find them to be a game changer when it comes to increasing your knowledge on building wealth through rental real estate.
Increase Profits by Working with a CPA Specializing in Real Estate
There are a lot of things to consider when it comes to preparing and keeping taxes on track, so it’s essential to not only work with an experienced CPA, but to also find the best one for your specific needs. Most importantly, securing an accountant who has a deep understanding of all things related to rental property investment taxes is essential.
If you’re seeking out a recommendation for accountants for property investors, I highly suggest considering Tom Wheelwright, CPA of WealthAbility. He’s the personal accountant for real estate tycoon, Robert Kiyosaki and also a personal friend of mine. You can contact Tom through our Lower Taxes informational page. For those who are not in a position to hire a CPA yet, you can get a head start by reading Tom’s book, Tax-Free Wealth. I’ve read it more than a few times and put his strategies into action, saving myself a substantial amount of money on taxes in the process.
Investors who are interested in making a new construction rental property purchase happen, or have questions regarding rental real estate in general, feel free to schedule a call with Morris Invest.
Before you go, dive into the following video where I interview Tom regarding taxes and rental real estate – Investments the Government Will Pay YOU To Make:
