Tax filing and tax accountant related questions

[Hersh M.]

How do most real estate investors deal with tax filing? Do you just hire a CPA/tax advisor before buying your first deal or do you do it yourself to understand legal/tax things better? 

Also do you have any advise/recommendations on how to go about finding a CPA or do it yourself? Does location of CPA matter? 

Thanks. 

[Brandon Hall]

Originally posted by @Hersh M.:

How do most real estate investors deal with tax filing? Do you just hire a CPA/tax advisor before buying your first deal or do you do it yourself to understand legal/tax things better? 

Also do you have any advise/recommendations on how to go about finding a CPA or do it yourself? Does location of CPA matter? 

Thanks. 

I'm a CPA and will offer up two questions that you should consider here: (1) what will you gain by doing taxes yourself? and (2) do you want to work IN your business or ON your business?

#1 - you likely will only gain education (expensive education at that) if you try to do your own taxes without any prior tax knowledge. Becoming a CPA and learning the tax code takes thousands of hours. It's complex and if you don't know what you are doing, you will cost yourself much more money down the line (think future CPA fees to correct your errors, missed deductions, incorrectly claimed transactions, etc).

#2 - I encourage you to read around on BiggerPockets and decide whether you want to build a scalable business or treat real estate investing like a hobby. There is nothing wrong with either approach, but if you want to scale a business, don't waste time learning the tax code. Hire it out.

That said, a good CPA will walk you through his/her logic and teach you what he/she knows. So you will definitely learn along the way. A good CPA will also stay in touch with you throughout the year and be available to answer your phone calls/ emails when necessary.

A CPA does not need to be local to you, many of us have clients all over the globe. The only thing we can't do is shake each other's hand. Make sure they invest as well and primarily service real estate investors. Here is a BP article I wrote on selecting a CPA and questions to ask:

http://www.biggerpockets.com/renewsblog/2015/03/08/investors-guide-find-hire-perfect-cpa/

This year, I've had several clients come to me who have either tried to prepare their own taxes or hired a non real estate savvy CPA to prepare them. The results were costly for the clients, both in my fees to fix the issues and the penalties/deductions missed. It adds up. Money isn't something to mess around with, so if you don't know what you are doing, at the very least hire it out until you do.

If your answer to the majority of the questions below is "no," then I'd suggest hiring a CPA:

1. Can you run down your Hud-1 and know which costs to capitalize and expense?

2. Do you know when a property is placed into service?

3. Do you know how to treat expenses prior to the property being placed into service?

4. Do you know how to treat expenses after placing the property into service?

5. Do you understand the IRS Final Tangible Property Regs, the three safe harbors that come with those regs, and the BAR test if you can't take advantage of the safe harbors?

6. Do you know how to prioritize repairs and various expenses to maximize annual deductions?

7. Do you know how to find the cost basis for depreciation? (Hint: you cannot depreciate land and you cannot apply a random ratio of 80% even though non-real estate savvy CPAs tend to do one or both of those).

8. Do you know what schedule to report your rentals on? (A, B, C, D, E, F, etc).

9. Do you know how to track and take advantage of travel expenses?

10. Do you know how to optimize local transportation expenses?

11. Do you know the difference between a business trip and a regular commute?

12. Do you know much about the home office deduction? Do you know how it affects your ability to take local transportation expenses as a deduction?

13. Do you know how to take meal deductions?

14. Do you know how to keep your books?

15. Do you know how to appropriately keep your records to substantiate all of your deductions in order to successfully fend off an IRS audit?

16. Do you know how to maximize tax efficiencies through entity structuring? And do you know how to file tax returns for these entities?

17. Do you understand passive activity limits?