Should You Prepare Your Own Tax Returns?

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It is a new year.  That means resolutions, new goals and plans and of course income taxes.  April 15th is not that far away.  There are many income tax benefits to the real estate investor.  Getting them however can be a bit daunting and definitely time consuming.

There are 1040’s, 1065’s, Schedule E’s, Schedule C’s, Schedule SE’s and many, many more forms to be filled out.  It can all seem incomprehensible, especially to the new investor.  In my experience, tax preparation is not difficult, but it is rather time consuming.  Despite the time factor, I would suggest that all investors, especially newer investors, learn how to do their own taxes and prepare their own taxes to the best of their ability at least once.  Doing so, I contend, has several benefits.

Why You Should Do Your Own Taxes

  1. You gain a real understanding of the cash flow of your business.  Yes real estate investing is a business and it is all about cash flow, positive cash flow.  Doing your own taxes forces you as a business owner to sit down and sort through what came in and figure out where it went.  You may see ways to improve your business that you had not seen before.
  2. Understanding how your taxes work will help you with your investment decisions.  You will have a greater understanding of the tax implications of any investment decision.
  3. Preparing your own taxes will make you keep a better tracking system of income and expenses.  Just dropping all your receipts in a shoe box until the end of the year is no way to run a business.  When you have to sort through all those receipts and remember what you purchased and why from last February, believe me you will vow to get a better system and that will only help you.
  4. Preparing your own taxes will make you confident when you have to explain them to someone.  As many of you know, anytime you ask a bank for money they want to see your tax returns.  Sometimes, bankers do not know exactly what they are looking at and how the money flows.  If you have the ability to sit down and explain it to them, imagine how that looks in the banker’s eyes.
  5. It may save you money.  Tax preparation is not cheap.  It can cost several thousands of dollars, especially when several entities such as LLC’s or other corporations are involved.

Tips for Preparing Your Own Tax Returns

If you want to try doing your own tax returns, be sure to do the following.

  • Educate yourself using one of the many fine manuals out there that explain tax procedures.  You can almost follow along line by line on the tax form with these manuals.
  • Get a book specifically designed to answer tax questions for the real estate investor.  There are several good ones out there.
  • Use some of the tax software that is available if your returns are not overly complicated.
  • Have a knowledgeable CPA or other tax preparer that you can ask a question when you get stuck.  You may even get that person to review what you have done.
  • And finally, don’t cheat.  Be honest and prepare them to the best of your ability.  If you don’t know how to do something, ask a competent professional.  Understand what your limits are.

As your business grows the time will come when it will no longer make sense for you to spend the time with tax preparation (my tax returns last year were 90+ pages for example!).  As they get more complex, you may actually cost yourself money by doing them yourself.   However, think of how much ahead of the game you will be with your accounting systems and knowledge.  Your tax preparation costs will be significantly reduced if the preparer does not have to sort through a shoe box full of receipts.

So, let me know with your comments.  Do you do your own taxes or hand the CPA a shoebox?  Did you do your own taxes yourself when you started out as an investor?  Did you find doing them beneficial?

Photo: Old One Eye

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About Author

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

35 Comments

  1. Kevin, I have never even thought of doing such a thing, but you present some very valid thoughts. We initially hired a large firm and received some good direction, but we now use a CPA who works full time for the county and moonlights.

    There is definitely a disconnect between our CPA and what we are doing as investors. I have thought that it would be nice to learn and have that understanding, but there are simply not just enough hours in the day!

    • Kevin Perk

      Jason,

      I understand about the lack of hours in a day! The key is to take baby steps. Read a real estate tax book, read a few tax forums on the internet, look over the tax forms and familiarize yourself with them and how they flow. If you do these things you will slowly begin to understand how they work. And since you have some returns from previous years, you can use them as a sort of guide. Perhaps you can make a goal to do the 2013 returns in 2014?

      At any rate, I would suggest finding a tax professional who specializes in real estate. Many CPA’s simply do not understand all of the ins and outs of real estate investing.

      Good luck, and thanks for reading and commenting,

      Kevin

  2. I don’t do my own taxes but I do try to make it easy on my accountant. I get a packet every year and fill in the vast majority of repairs and rehab costs. I estabish baselines for the cost segrigation approach on new properties. I learn a lot every year and usually have several questions for different plans and strategies going forward.

    I get to have accurate operating cost breakdowns as well as tracking many different metrics into each property. By doing this work I get to see this stuff as you mentioned but also get to have a qualified professional double check everything and properly place it all. My questions get answered and I get a fanstatic price because I make it easy for them. Also as I grow I am also always analysing new ways to better track and collect data which makes everything easier as I go and allows me to pick up on other trends as well.g

    • Great point Kyle. That’s the route I take.

      The more organized you can present your numbers to the CPA, the less time they need to spend on it, and the less time they spend on it, the less they charge, and the less they charge you, the more you make!

  3. I stopped doing my own taxes when I had my accountant review them and found I had cost myself money. As my investing life is more complicated, I find that I miss stuff that an accountant would know, but I might not. Therefore, I use an accountant WHO UNDERSTANDS SOMETHING ABOUT REAL ESTATE INVESTING. That’s critical. He’s also a small business specialist.

    H&R Block does NOT cut it for real estate investors. And a good accountant usually saves you more than he costs you.

    I use quickbooks, with a chart of accounts specifically designed for real estate investors. When the file is clean, I send my QB file to the accountant. Along with a couple pages of notes explaining what is going on. Don’t assume he can read your mind. And a shoebox full of receipts is just asking for higher costs and lower savings.

    • Kevin Perk

      Ann,

      Yep, you can cost yourself money, you really have to get to know the code for real estate investing. So you bring up a very valid point.

      You also bring up the great point which I mentioned in my response to Jason above. Find a CPA who understands real estate investing. Otherwise money may be left on the table.

      We used Quickbooks as well, but it was a pain in the @$$ because it is not designed for real estate investors, it is designed for people who make and sell widgets. So many things had to be “modified” that it became very difficult for us.

      Glad that your system is working for you.

      Thanks for reading and sharing your advice!

      Kevin

    • Ann,

      Did you make up this chart of accounts yourself, or do you follow some guide somewhere on QB for RE investors?

      I’m waiting for my copy of QB’13 to arrive and really don’t have much of a clue on how I’m going to proceed, other than maybe getting one of the QB eBooks you see from time to time on RE investors using it.

  4. Brandon Turner

    Hey Kevin, Great article. I’ve always done my own – but I think I’ve done a pretty terrible job! However, each time I do it – it forces me to create a better record keeping system for the next year (just like you said.) So It’s definitely helping! But I think I’ve done enough – I’ll probably hire out this year!

    • Kevin Perk

      Brandon,

      I bet you did a better job than you think! As you say, it does force you to better your business accounting practices, which helps your business overall.

      So where will you look for a tax preparer who specializes in real estate investing?

      Good luck and thanks for reading and commenting,

      Kevin

    • Kevin Perk

      Jeff,

      Yes, we usually can find the answers. But there are gray areas where it is nice to ask for a professional opinion or two.

      Thanks for reading and commenting,

      Kevin

  5. It’s surprising to read this because I thought the vast majority of the investors here advocated hiring a CPA. I do my own taxes. It’s not complicated and I have a tax book for real estate investors to refer to. I can also look on this site for answers.

    • Kevin Perk

      Thanks for the backup Shanequa!

      As I said I found tax preparation time consuming, but not necessarily difficult. There are almost step by step answers out there.

      Thanks for reading and commenting,

      Kevin

  6. Myy sister-in-law has done our taxes for several years. Last year it took her six hours of beating up TurboTax and calling the IRS to get some answers. I figured with this year with our newly bought rental properties, it was just a bit too much for her and TurboTax to handle. I asked her is she knew about cost segregation studies and she basically said no.

    Solution: I found a CPA that IS real estate investor. That is the best kind, because he has his own skin in the game. He knows lots of things that I wouldn’t have had a clue to research. Ever do cost segregation studies? Do you even know what that is? Even if you do, the key is finding someone that knows WHEN to use that tool and when NOT to use it.

    That was one of the reasons I decided it was time to hire a real professional (not H&R Block or the guy-down-the-street) but someone who spends time keeping up with our rapidly evolving tax code. I don’t have time for that.

    It also doesn’t excuse me from keeping good records to work with him. It’s one of the reasons I bought NeatWorks, to track all my real estate, personal, and business receipts. Time to start prepping, because I want to get this year’s taxes done as well as file those amended returns for the past two years, and get some money back! (Another thing he helped me spot after talking on the phone for 30 minutes).

    • Kevin Perk

      Greg,

      Thanks for reading and for the great comment. You are on top of things. You are spot on as far as hiring a professional who knows about real estate investing. Many CPA’s are more adept at working with people who produce widgets rather than folks with passive real estate income.

      Yes, I have done some cost segregation with some of my properties. For those of you not in the know, you can depreciate different things at different rates. Most folks will simply depreciate everything on a property over 27.5 years, but you can segregate out things like the HVAC system, the hot water heater, appliances, the ceiling fans, the sidewalks, etc and depreciate them over 5, 7 or 15 years depending on the item, thus earning a greater tax deduction. I have generally found cost segregation not to be worth the bookkeeping hassle and record keeping nightmare (Learn or ask a professional about cost segregation before you try it as it can get complicated rather quickly.). Plus, I already have more than enough deductions.

      I am glad you have found a system that works for you and I completely understand when you say you do not have time to keep up with the tax code, it can really be hard at times with everything else going on in our lives.

      Thanks again for reading and for commenting,

      Kevin

    • When I first read your reply about cost segregation studies, I immediately thought I was leaving money on the table until I found out that it meant depreciating items. I depreciate each item separately. It’s not that much work and any good tax real estate book will cover this topic. Last night I spent close to 2 hours reading IRS publications regarding what closing costs can be deducted when refinancing. I hate math, but love learning about tax rules that will save me money. Maybe it’s just me, but I have a hard time paying someone and still being responsible for repayment and penalties if I get audited.

      • Kevin Perk

        Shanequa,

        I do some cost segregation, like with closing costs as you mentioned. However, some folks go to the extreme and recommend depreciating everything like every light fixture and that can get a little complicated to keep up with, especially when you have to replace them and start the depreciation schedule all over again. So I tend to limit is somewhat. Perhaps I have found a new blog post here. :) But you are right, it is just math and it depends on your math tolerance level so to speak.

        Glad to see you are researching tax benefits, many tax preparers are so overwhelmed they may miss something unless they are focused on real estate. It is always wise to ask your tax preparer “Are you aware of this rule/deduction.”

        Your last line is key. Even if your tax preparer messes up, you are still on the hook. So the more you know the better.

        Thanks for keeping the conversation going.

        I appreciate your comments,

        Kevin

  7. Rolanda Eldridge on

    Good info… I’m like the shoebox person but in 2013 I’m doing things differently . Usually I dread tax time and have to get an extension every year. Not this year!!! All paperwork for 2012 dropped at CPA last week.. I’m waiting on interest statements and misc documents…stayi g organizesd in 2013! Please recommend any software suggestions for monthly bookkeeping. I have a Mac and the last time I tried quick books it was frustrating… I really would like to pull P&L statements and such at a moments notice. I also would like to email docs to CPA.. Heading in the direction of paperless …

    Thanks

    • Rolanda,

      I have been using NeatWorks for Mac to scan and track all the receipts and statements I deal with. With that, I have multiple cabinets for different things, including company expenses, real estate, and personal stuff. My plan is to keep a different one for each year. This will make it easy to spit out a report and send it to my CPA.

  8. I am a new real estate investor, and I have made the decision to do my own accounting and taxes, at least for the first few years. I agree with many of the points in the main article… I have found that I’ve learned a lot and some of my investment/operational behavior has changed so that I can take advantage of tax benefits. I do not think this would not have happened otherwise (or at least not as quickly).

    A book that has been invaluable to me (and very easy to understand) is ‘Every Landlord’s Tax Deduction Guide’. Has anyone else tried a different or better resource in their opinion? If so, I’d like to look into it!

    Thanks,
    Matt

  9. I haven’t but several realestate friends in my REIA have had accounting “professionals” earn them an IRS tax audit. One of the problems with hiring any tax preparer is that there’s an inferred request being put on the table that they have to prepare a tax return that has you pay less tax than the prior tax preparer. You can see how this turns out regarding the IRS… For instance I have a day job, do alot of buy, rehab, rent and hold per tax year. The stimulus bill allowed alot if not most depreciateable fix ups to be taken in one year via the 179 deduction. I of course as I type this have the terms wrong but my point is that a tax preparer would have had me pay nearly zero tax last year if I took all of the 179 deductions I could have. Since I was in the drivers seat I chose to take the extremely conservative tactic and take fewer deductions, pay a bit more tax and be a very low target for IRS audit. Or if I do get picked for audit, I’ve built in alot of cash I can pull out of a re-working of my taxes in an audit scenario to pay for what ever penalties plus a bunch. :)

    Watch out for over zealous tax preparers!

    curt

    • Kevin Perk

      Curt,

      Good advice. You want someone who is not too fond of those gray areas. I always want to keep things above board as much as is possible.

      Thanks for reading and commenting,

      Kevin

  10. I recommend the tax guide for landlords by NOLO and Aggressive Tax Avoidance for the Real Estate Investor by John T Reed.

  11. I am a CPA and really want to chime in but am afraid my opinion is very biased.
    Many have already stated an important fact that your CPA should be knowledgable about real estate investing. (i.e. they should know when to use cost segregation and when they shouldn’t)
    Not all CPAs are created equally and some are a huge insult to my industry. If you come across one of those guys (i.e. you feel like there is a disconnect between what you do and the CPAs understading) run away quickly. Loyalty can be one very expensive.
    A good CPA will ALWAYS save you more money than you pay them. If they don’t, then he or she isn’t a good CPA.
    An investor should always be tracking the profitablity of each deal and not rely on tax time as a reminder to add up the receipts and see where they ended up. Whether you do your own taxes or have someone else to do them, you should regularly review income and expenses.
    I think an investor that doesn’t use a good CPA is crazy.
    I think an investor that doesn’t track their deal profitability regularly is crazy.
    I think a CPA who can’t provide more value than they charge is worthless.

  12. Ok…so I do feel the need to comment on this post of course since I am a CPA also. My opinion may be biased as well but here goes:

    1. I actually don’t think everyone needs a CPA. I often speak with people that I feel are savvy enough or have simple transactions that they may be fine doing taxes on their own using Turbo Tax.
    2. I do think that if someone is an investor with complex or creative transactions that it is definitely a good to at least meet with an advisor. Like someone commented above…you just don’t know what you don’t know.
    3. The more you know the more dangerous you may be. I have spoken with people in the past who do their own cost seg or even do their own tax returns for syndicated deals. Both of these are high risk areas so my personal suggestion is if you are dealing with either of these to at least have your returns reviewed by a CPA.
    4. There have been a few times when I reviewed self-prepared returns from people where inputs are entered incorrectly in the off-the-shelf software and people end up double or tripple deducting the same item on different schedules. So whether you self-prepare or have a CPA prepare, always make sure you review the tax returns before siging on the dotted line.

    • Kevin Perk

      Amanda,

      I think you have provided wise advice. It is true that you can do your own returns, but you better have someone knowledgeable to go to when you have questions. Plus as you get more complex and sophisticated you should probably involve your CPA more and more.

      Thanks for reading and for commenting,

      Kevin

  13. Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a form 1040 Schedule SE, I found a blank form here http://goo.gl/svp8AB. This site PDFfiller also has some tutorials how to fill it out and a few related tax forms that you might find useful.

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