Business Management

How I Learned to Stop Avoiding Taxes — and Got the Best Deductions Yet

Expertise: Real Estate Wholesaling, Real Estate Marketing, Business Management, Personal Development, Flipping Houses
65 Articles Written

It's 2017. I can't believe I did my first deal back in 2011. It's been 6 years, and I am still at it. Four of those six years, I have been a full-time investor. I have been getting better at this real estate thing. I have been blessed to survive in business full-time for four years. It wasn't easy, but all the bumps and bruises were well worth it. It beats having a job.

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Today, I am going to talk about a subject a lot of investors have an issue with. I just realized the importance of this matter myself. That is taxes. In this blog, I will talk about my mistakes, and hopefully you will learn from them. If you’re like me, when the tax subject is brought up at your local real estate club, you usually leave out of boredom. I have discovered that not all accountants are boring, and some know how to break it down to where the average Joe can understand.

Related: What Real Estate Investors Can Do Now to Prep for Trump’s New Tax Plan

My Experience Hiring Virtual Bookkeepers (Spoiler: Bad Choice)

To do your business taxes, you must have a bookkeeper who will prepare your P&L at the end of the year to provide to your accountant. This bookkeeper could be you. I know some of you probably already know this is important, but a lot of us were not aware of this. I have failed many times with this matter. At one point, I would go on and hire really cheap bookkeepers. I believe I picked one up for $3 an hour. The person was across seas. That was a bad idea on my part.  I was confused why he was taking so long. So then I hired another person to check his work. And that person told me the fist person was screwing me over and that my stuff should take no longer than 3 hours a month. So I fired first guy.

And, of course, the new guy eventually disappeared on me. I hired another woman, and I paid her about $11 an hour. She advised me the other guy was just billing me and not doing the work. Oh yeah, I forgot to tell you while I was running through bookkeepers, my CPA was waiting for the documentation needed to get my taxes done. It was a mess. The new lady was working out well. She would do my books in 1.5 hours — at least for a few months. Then she disappeared on me. At this point, I was fed up and realize I couldn’t hire cheap people because they only led to cheap results.

Finding Real Estate-Specific Tax Advice

I found an actual bookkeeping service this time. I hired them, and that had been going really well. Then it was time to do my taxes with this new bookkeeper. My ex-CPA advised me two weeks before my taxes were due that he could not read my bookkeeper’s work. I’m thinking to myself, why would he wait so long to tell me that he could not read my bookkeeper’s work? If that’s important, you would think the CPA would ask for the bookkeeper’s work earlier in the year. He then told me he had some bookkeepers that might take me on for $75 an hour. I knew he didn’t like me as a client — and I didn’t like him either. The problem was, I was never prepared and I didn’t like him because when I actually started getting my stuff together, he wasn’t ready for it. We decided it was best not to work together. I did get another CPA who was able to read my bookkeeper’s work, and we got the taxes done.

Now fast forward to me talking to my CPA for a year-end review. He told me my potential tax bill, which was the price of a 3-bedroom rental in my market in a working class neighborhood. I said to myself, that can’t be right. I called real estate expert Gary Boomshire, and I told him about my issue. He asked me to calm down and told me we could get through this. He told me what documents to ask for from my bookkeeper, called my 401k company and set up a time to talk to his preferred CPA.

Related: How to Pay Zero Taxes, Minimize Risk & Keep Your Sanity While Live-In Flipping

Gary went through my P&Ls and balance sheet and asked me about a large number of withdrawals. I advised him that I did not know exactly what that was. We then called my bookkeeper to get a printout of what that was. I had to go through each item — apparently some things were allocated wrong. So it was kind of my fault for not checking my bookkeeper’s work monthly. My new CPA then hopped on the phone to explain where to allocate certain things. This was all because someone cared about me enough to hold my hand and walk me through this process. I was able to get my tax bill down from the a price of a 3-bedroom middle class rental to a cheap little D-class house.


What I Learned From All of This

I learned that in past years, I was actually overpaying the IRS. In order to prevent this, be sure to stay on top of your books. I am now scheduling a meeting once a month with my bookkeeper to make sure that everything is allocated right. I even read BiggerPockets’ The Book on Tax Strategies for the Savvy Real Estate Investor. This is a must-read. I learned I missed a few deductions in past years. Also, be sure to meet with your CPA quarterly and make sure that your bookkeeper and CPA are on the same page. When you know better, you do better. And in disclosure, I am not an expert, CPA, or even anybody good with numbers. I just hope you can learn from my mistakes. The IRS must get their money, and you must be prepared.

What’s your worst tax horror story?

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Nasar El-arabi has been involved in real estate for 12 years. During those 12 years, Nasar has wholesaled houses, rehabbed properties, built new properties, created a buy and hold portfolio, and fl...
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    Tom McCombs Investor from Akron, Ohio
    Replied over 3 years ago
    A virtual bookeeper — any other kind — depends on the information that you yourself provide and that information can only be provided by you. It has been my experience that the software out there will walk you through the bookeeping and tax preparation process in such a simple and easy to use format that anyone can do most of it him(her)self. If you can read, you can do it yourself. The most time consuming work is the gathering up of the receipts and deposits. Neither the bookeeeper nor the CPA can do anything for you until you have provided that info. And once they have those materials, the rest is easy. I would suggest that you should go install one of those tax prep programs like TurboTax (there are several others also) and just take a look at it. You can save yourself a lot of preparation money, without spending much more time.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied over 3 years ago
    Hi Nasar, It takes a big man to write about mistakes one has made! tnx. This title strikes a chord with me and our business practice. In the opposite way that you ran into problems, because we don’t have these problems and because we solved this problem much differently, and in my view with MUCH less effort than trying to out-source what really is simple tasks. You said the book keeper took 1.5 hrs / mo…. But you did NOT say how much time did it take you to shuffle stuff too her and back?? Another 1.5 hrs? We self manage 35 rentals we bought, fixed and rented, hire out repairs and rehabbing but keep simple books ourselves and use turbo tax for our 1040 and all the Schedule E’s. I can say 1st hand, there is NOT much to tracking rehab expenses (repairs vs improvements) and using turbo tax to do taxes for all of our real estate holdings. I fear you and so many other REI’ers have avoided learning the simple tax code for rentals and possible Sched C income from flipping. Flipping and wholesaling from within an S corp is also no big deal and you are so much better off knowing about all your numbers and how they plug into the tax code!. You said it yourself, you had no idea what some big numbers meant. To me this was your biggest failure not knowing intimately what your business is doing numbers wise, not the fumbling around trying to save time outsourcing,,, which didn’t sound like saving of any time to me. 🙂 Here’s a quick over view of how I keep track of expenses per house. One does NOT need to use Quick books etc etc. Sure having a monthly P&L is nice but if you are very profitable like we are, I don’t need a P&L I just need to look at bank balances each week via the banks website. A few seconds of time. Use gmail (or some other email service that allows you to create folders or lables as gmail calls them). – create a folder per project as: 123Main – Setup a Home Depot Pro account, put in all your CCs you buy on. Now when you buy from HD they will email the receipt to you. At the cash register you put in a PO #, say 123 as a short hand for 123 Main – In the evening: move the Home Depot receipts per house to the houses / project’s folder. – When you pay a contractor in the field with a check take a picture with your phone and email to yourself with the subject as: 123 Main – $123.45 labor to Mike – Again in the evening move this email into the right folder. – I’m always taking pictures of punch lists, scribblings between me and contractors etc and emailing to myself, then filing in the gmail folder. – All the closing docs are also in this folder so the complete house history is in one place. We also use google Docs for traditional files being stored too, leases, applications etc etc. Not everything is in gmail folders. We also use google docs folders (per house) and sub folders. Then in March when you do taxes you just run through each gmail folder for all materials, labor etc etc for each house. Schedule E punches out in 1/2 hr max. NO ACCOUNTANT needed. The above allows you to be paperless thanks to your camera in your phone and gmail. I can bring docs home to scan (Neat Scanner) but no need at all. I take pictures with my phone in the field and can toss the paper. I don’t, I still have file folders in a file cabinet but I never go there come tax time, its just back up. There’s are great CPAs here on BP (Brandon etc) who give great advice and good tax education. But I believe you won’t learn much unless you take parts or ALL of it in-house and have skin in the game (thus your brain engaged). Why not do the above steps as I outlined to avoid the accountant hassle? Why not use Turbo Tax and then run the results by your tax guy??? Soon I predict you’ll just be mailing the turbo tax returns. 🙂 I’m certain that in no time you’ll be saying,,, geeze this is dirt simple and a lot less effort keeping it in house than shuffling paper back and forth in the hopes someone else cares as much as you about your business and does it all correctly. LOL Not…
    Mike Dymski Investor from Greenville, SC
    Replied over 3 years ago
    Curt, not everyone will agree with your approach but I think it is exceptional that you took the time to share such a detailed reply. Well done.
    David Briley Real Estate Agent from Amesbury, Massachusetts
    Replied over 3 years ago
    Although not a major point of the comment, DEFINITELY TAKE PICTURES OF EVERYTHING THAT’S IMPORTANT: Checks, business cards, HD temporary store credit cards from refunds, you never can take too many pics/videos of every room of a house at EVERY stage, notes on scrap paper, open house sign in sheets, shopping lists, etc.
    JL Hut Investor from Greenville, Michigan
    Replied over 3 years ago
    Amen Curt, I do all my own now, about 8 years ago I fired my CPA that charged me $190. per hour and hired a college student to do the work for $15. hr. Every year I would find mistakes, so I said your fired. Now I earn $8,000 in the month of February by paying myself to do my taxes while the snow flies outside. Good CPA’s are great for tax saving ideas, new structures or to review your return every 3 to 5 years, but I would rather do it myself. That way everything I do through the year I know how it fits into my tax plan at the end of the year. Hang in there Nasar, you can do it, every year it get easer. With todays phones and software you just need to work it into your days routine.
    Michelle Moore from Richmond, Indiana
    Replied over 3 years ago
    The last time I paid someone to do my taxes, I was charged $2000 so I decided to give it a shot myself. I now use Turbotax, and spent approximately 10 hours last year from start to finish. (I have 45 rental units and a few flips each year) Since 5 hours is spent gathering the expense numbers which I have to do either way, it is a good use of my time. I am getting “paid” $400 per hour. Keep track of your expenses as you go. That is the key. When I had less than 10 units, I kept records on paper. When I got more than 10 units, I switched to Quicken. I enter all expenses for the week every Saturday morning, then file the receipts. I hire people to do it for me sometimes, but as you have noticed, they are unreliable. It is easier for me to do it myself than watch over their work and then have to train a new person when they leave (frequently).
    Alice Lawrence Investor from Brooklyn, New York
    Replied over 3 years ago
    ‘Bookkeeper’ is sometimes confused with a trained accountant. A skilled accountant will get the job done. I agree with the approach of hiring a suitable pro and being very active in reviews.
    Michael Baum from Olympia, Washington
    Replied over 3 years ago
    An additional tool for scanning documents is an app for you phone. I use Genius Scan (IOS) for that. Turns whatever I take a photo of into a PDF. You can then mail it to yourself. Very useful and a bit more professional if you have to mail that document to someone as a PDF vs a JPG.
    Tim Tucker Investor from Jacksonville, Florida
    Replied over 3 years ago
    FYI – CamScanner is good for Android users.
    Mike Dymski Investor from Greenville, SC
    Replied over 3 years ago
    Leverage and taxes are the two largest benefits of real estate investing compared to other asset classes and the two most misunderstood aspects of real estate investing.
    Walter Jones Real Estate Broker from Hazel Crest, IL
    Replied over 3 years ago
    Thanks for sharing got lot out of all the comments
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied over 3 years ago
    I’ve been using TurboTax for years (my other business is mostly 1099). I’ve learned that if I just let TurboTax “walk me through” I miss out on huge tax deductions – the software is too vague when it is asking questions, only asking you what deductions you had, not telling you what deductions you should be looking for (especially weak in the travel expense department). That said, it IS good at the math, & in 2015 tax year version it did mention the $2500 de minimus ruling (good!), but that was all over BP last year (better), and I’d heard about it first from my parent’s tax accountant (best), and started researching it on my own due to her comments. Double-check everything at the forms level to make sure it is counting all of your deductions, & not showing the same items twice (i.e. a new $500 copier can be either a 179 deduction or depreciating asset, not both, if you’ve taken 100% of the depreciation in the first year).
    Casey Murray Investor from San Diego, CA
    Replied over 3 years ago
    I agree there’s a huge difference between a bookkeeper and a CPA. A good bookkeeper will have your financials properly prepared to hand over to your CPA. A good CPA will assess your tax situation and determine what’s best. When you’re flirting with the idea of accelerated depreciation and business entity structures, a good CPA should be on your team. Look at it as an investment. Great article, Nasar.
    Bryan Drury Investor from Owensboro, Kentucky
    Replied over 3 years ago
    Curt Smith, Thanks for going to the time and trouble to detail your methods and procedures.I’ve been looking for better ways to streamline bookkeeping and tax preparation. I’m going to utilize your information. Thanks again, and have an excellent 2017.
    Jarron Jackson Real Estate Investor from Memphis, Tennessee
    Replied over 3 years ago
    Great informative article Nasar, Thanks for the heads up!1
    Leanne Rivard Residential Real Estate Broker from Littleton, Colorado
    Replied over 3 years ago
    Great article as I am in my office, dreading entering receipts into Excell. I have a CPA, but hand all the numbers over to him. I also have to file in Canada, since I own property there. I spend hours and hours doing my bookkeeping and I hate it.