Put Some 'Preparation' in Your Tax Preparation

Tax Preparation might be one of the least appropriately named services I know of. The definition of ‘preparation' is the action or process of making ready for an event or undertaking. In the case of tax preparation this should mean the process of making ready to pay your taxes. Unfortunately, that is ABSOLUTELY NOT what tax preparation currently means.

The thing we currently refer to as tax preparation is applied to the preparation of the annual income tax return. When we complete the return we are not preparing for taxes, we are preparing a tax document. This is actually tax reconciliation. We prepare a tax document in 2018 to determine the proper amount of tax owed for 2017. We compare that amount to the amount paid thus far for 2017. If there is a difference we reconcile it with either a refund or by paying any additional unpaid taxes.

This reconciliation process is necessary, but honest-to-goodness tax preparation would also be extremely useful for most real estate investors. A session where you sit down with a knowledgeable tax professional and PREPARE (a.k.a. strategize) for your future taxes.

Assuming this year is like past years, several real estate investors will visit me at my Virginia Beach office, tell me they have taken some action that is causing them a significant tax burden, and then ask me how to fix it so they don’t have to pay this large tax burden. I will have bad news for them – I can’t fix it after it’s done. After it is done we can only reconcile and pay the tax. If you want to reduce the amount of taxes you are paying you have to prepare BEFORE you take actions with your property.

I am not sure why many real estate investors seem reluctant to engage in tax planning. There are probably many different reasons. Some seem to believe they already know enough about taxes to avoid issues. Some are concerned they will pay a tax planning fee and not see any tax savings as a result. Some don’t want to bother me. I have current clients who call me and apologize for asking me simple questions. I can’t speak for all tax professionals, but I’m pretty sure the vast majority would rather answer your questions now than tell you later that you cost yourself an additional $10,000 in taxes. We hate paying taxes, too, and love to provide that kind of value to our clients!

I’ll keep this post short and sweet. My point is this – don’t be fooled by the term “tax preparation”. If you only talk to a tax advisor when it is time to file, then you aren’t really preparing at all. Ideally you get a good working relationship with someone you trust, and you contact them before you make a move with your property. That way you won’t get blind-sided when it comes time to reconcile this year’s taxes.

Best of Luck with Your Real Estate Investing!