BiggerPockets

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.

Comments

1. 

   Sharad M. Reply
   about 1 year ago

   Charles, great post! Look forward to the next installment.

2. 

   Kevin Kaczmarek Reply
   about 1 year ago

   Charles, very good post(s). I learned some new insights. Thank you for sharing!

3. Claudine Tewari Reply
   about 1 year ago

   I am starting to strongly consider investing in real estate. I also would like to start working with mostly novice investors and help them find qualified professionals such as CPAs for their team. Is there a list of questions you would recommend asking of a CPA to assess their appropriateness for the investment team?

4. 

   Charles Perkins Reply
   about 1 year ago

   I can prepare a list of questions. In my opinion you want questions that will assess a CPA's level of understanding when it comes to real estate transactions. I would ask if they also invest in real estate themselves.

5. Claudine Tewari Reply
   about 1 year ago

   That would be great. Good question to start of with......thanks.

6. Kaye Dennan Reply
   12 months ago

   Very good points Charles. So many investors do not realize the value in working with a CPA who knows the ins and outs of real estate investing and consequently lose out on a lot of claimable expenses.

7. 

   Charles Perkins Reply
   12 months ago

   Kaye, not only is there the risk of missing claimable expenses, I think some risk an audit because they are not made aware of the need to separate some activities. Also some loose out on tax deductions because some CPAs are not aware of all of the rules.

8. 

   Carlos F. Reply
   9 months ago

   Charles, I will be on the lookout for that list of questions.

9. 

   David Wedemire Reply
   9 months ago

   Good post Charles Looking forward to more

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