BiggerPockets

What should RE investors look for in a CPA? (Part 3)

Sunday, May 29

ANOTHER IMPORTANT CONSIDERATION IS A CPA'S EXPERIENCE

Many types of experience can be helpful for a CPA.  Having worked in or owned a private business can be valuable to understanding real world accounting.  Having real estate investments can aid in understanding the costs, processes and risks of investing.  Tax planning and audit experience can also prove valuable in staying out of trouble and reducing tax exposure.

Business Experience

All CPAs are required to work in public accounting for at least a year in many states more than a year.  Some CPAs though never gain exposure to private industry because they have worked exclusively in public accounting.  This is not necessarily bad, but there are real world situations that come up in private accounting that a public accountant rarely sees.

A CPA that has managed and/or owned a private company will have greater business insight and understand better how business transactions are dealt with on a day-to-day basis.

Real Estate Investing Experience

Real estate investing can be done in many ways.  A CPA involved in the world of real estate investing and has bought and sold real estate is going to have a far greater insight in how these transactions are and can be accounted for.  Real estate investing experience makes it far easier to understand real estate possibilities and scams.

Here is a small sample of the varied nature of real estate investing:

• Leasing residential properties
• Leasing commercial spaces (which may include CAMs, NNN terms and generally lease longer than a year)
• Rehab/construction activities that may involve a flip or not
• Short sale transactions
• REO transactions
• Investing with an IRA or 401K
• Selling property on installments
• Seller financing arrangements
• Lease option, subject to and wraps
• Buying and selling real estate paper
• REITS and TICs
• 1031 exchanges
• Real estate development or redevelopment
• Low income tax credit properties
• Buildings listed on the historical record
• Cooperative Housing

A CPA that has experience in some or all of these areas can be a huge asset.  First they will have a better understanding of the nature of the transactions and can better account for them.  Second understanding the nature of these transactions can help in better tax planning and a greater assurance that the transactions are recorded properly.

Tax planning experience

Generally speaking a CPA will learn more about tax planning strategies working in public accounting.  CPAs can learn various strategies from seminars and other sources as well, but it does take considerably more work and dedication.

Audit experience

A CPA that practices before the IRS learns a great deal about what the IRS is looking for in the accounting records and the interpretive process that the IRS goes through in determining revenue and the deductibility of expenses.

There are a number of areas that are not clear cut.  Having some experience with tax audits can make it easier to see how the IRS is more likely to rule.  It also helps to know when you should appeal or go to tax court.

When you consider a CPA, you will want to look at the CPAs experiences in business, real estate investing, tax planning and in working with the IRS.

Here are links to earlier posts in this series

Part 1 - Outline for Finding a CPA

Part 2 - CPA should understand the various types of investors in the tax code

What Should Real Estate Investors look for in a CPA? (Part 2)

Thursday, May 19

CPAs specialize in different areas of accounting and tax.  You will want to find a CPA that understands federal and state income tax codes related to real estate investing. 

The federal tax code applies different tax treatments to various real estate activities.  So, it is important that any CPA that you choose know how various real estate investors will be taxed.

There are 4 categories of investors:

• Buy and Hold investor or a passive investor
• Real Estate Professional
• Real Estate Dealer
• Developer

A CPA working with RE investors should clearly understand how each of these categories is treated differently and the consequences of investing across categories.

CPAs often help with entity formation as well, understanding the tax treatment of these 4 investment categories is important to that choice.  Obviously there is more to consider, but federal and state taxation is an important part of that choice.

BUY AND HOLD INVESTORS

Buy and hold investors enjoy some favorable tax benefits under the current tax code.  They are able to take depreciation, defer gains with a 1031 exchanges, and can claim many expenses associated with renting a property.

Not all buy and hold investors though get treated the same.  A good real estate CPA is going to need to be very familiar with the active participation rules and the loss limitation rules imposed on high income earners.

REAL ESTATE PROFESSIONALS

Real estate professionals with rental properties will not be subject to loss limitations.  It is important then for CPA specializing in real estate to know who qualifies as a real estate professional.  Investors may own multiple real estate properties as well and these are all treated separately unless a special election is made to treat them as one activity.

Many can get confused and think that a full time real estate agent is always going to be considered a real estate professional.  That is not necessarily true.  Real estate professionas can be involved in many aspects of real etate and it is important for a CPA to understand how the 750 hour rule and full time rules apply.

REAL ESTATE DEALERS

Real estate dealers are involved in a business and their real estate activity is not considered passive.  Wholesaler, rehabbers and others can fall into this category. 

It is very important for a CPA specializing in real estate to understand what it means to be a dealer and have some idea of what activities, business decisions and volume could lead to this designation. 

For some investors it is very clear that they are dealers and that they should look to a business form that can minimize the impact of this tax designation.

Dealers are not allowed a deduction for depreciation.

DEVELOPERS

Developers are faced with some of the least favorable tax treatment in the tax code.  There are special incentives for developing certain kinds of properties, but these credits require a developer to go through many hoops to qualify with no guarantees and still require a developer to put a significant amount of capital in beofre recieving any credit.

A CPA working with developers needs to be well aware of when income and expenses can be recognized.  They need to know how development costs are capitalized and when they can be expensed.

Investor categories is one of the first areas that investors should review with any perspective CPA.  Understanding these designations and how taxes can be minimized is very important for investors looking to keep more of there hard earned income.

I will look at other considerations in future posts.

Mixed Use Bldg before and after Pics

Thursday, May 19

Finally getting my pictures together.  Many you saw the before pics.  The commercial interior has been completed.  Still need to check the roof and do something with the siding. 

 Part of the original entry

As it looks now

 Looking intomy office and hallway before

After

 Conference area

Work remains, but I in the office.  Next step is to get the basement apartment ready.

What Should Real Estate Investors Look for in a CPA (Part 1)

Saturday, May 14

There is a lot to understand when it comes to investing in real estate.  Not the least of which is what is a good real estate deal, how to find it and how to get out of it when the time comes.  There are many ways to invest in real estate.  There are a number of ways to finance real estate transactions.  The real estate market can vary significantly between location, real estate investment vehicles and exit strategies.  There are numerous tax codes that deal with real estate activities.

A CPA that is good for investors will understand the nature of the real estate industry and have a good understanding of tax and business issues. They will also stay up-to-date.

Just as investors are not created equal, not all CPAs are created equal. 

In this series, I want to take a look at some key considerations when choosing a CPA.  CPAs have many backgrounds some of which can be very helpful to real estate investors.  Other CPAs may be good, but lack the broad understanding of the real estate needed to guide real estate investor.

Here is a list of considerations that I plan on walking you through in my upcoming posts.

1)  The 4 basic types of real estate investors defined in the tax code and how the relate to the many ways to invest in RE.

2)  The importance of various types of real estate experience.

3)  A sound understanding of the various tax code sections effecting real estate investing.

4)  A sound understanding of business transactions especially in how it relates to real estate.  A good CPA should be able to pick financial statements apart and understand what is missing.

5)  At least a basic understanding of sophisticated tax and retirement planning issues surrounding real estate investing

6)  A good CPA needs to understand real estate transaction well enough to offer sound general and specific tax planning advice.

I may address some other considerations as well, but these are important areas to consider when looking for a CPA for your real estate related activities.

Working with City Planners can be frustrating

Sunday, April 03

I'm working on my mixed use building getting it ready to move into.  While I verified many things with the city ahead of time there are some issues that I will clearly address better in other commerical purchases.

Issues that are coming up:

1)  The building's current use has enough parking spaces. There are some changes that could make better use of the property, but will require a handicap space, 1 additional parking space and some landscaping.  

2)  As a mixed use building at least 50% of the building must be allocated to residential.  I'm sure that the entire building could become commercial though which would address this issue.  To add commercial space would then require adding residential space.  Doable leads to parking issues.

3)  An area is available for additional parking.  Problem is that a land use permit must be filed, neighbors allowed to comment and a 20 foot separation buffer must be put in to separate commercial/multi-family space from SFR residential space.  That process is likely to take 6 months to a year.

These issues do place some limits on the property in its current state and I have adjusted my current plans for the building to just make better use out of the existing space.

The owner of the apartments on one side of meis distressed and struggling to stay afloat.  THe neighbor on the other side of me is a dental office where the owner of the building works and is wanting to retire in the near future.  

I'm hoping to work with the dentist to perhaps purchase that property in the next couple of years.  That will greatly add to the value of my current lot.

First commercial property - a new adventure

Friday, February 18

I want to share a few pictures of my first commercial property.  Not a charmer by any means but it is a diamond in the rough.

Some exterior pictures

 This is a mixed use building with a basement apartment.

A few interior pictures of the retail/office area before I have done any work. 

One of the things that has to go is the green and white 

There are two existing offices that will need some work as well. 

Downstairs apartment

As you can see I will have some work to do.

My office will eventually be behind this door. 

 This is what is currently behind the door

It will need some work obviously.

I'll share pictures of my progress as I take this ugly duckling and turn it into something of real value.