The importance of a CPA with RE knowledge

[Kristina Pearson]

I've been working with my current CPA for several years and have built a lot of trust, however, she's never worked with REI, rather entrepreneurs in almost every industry but RE. And after reading/listening to several books/podcasts including BP, know it's recommended to work with a CPA that has RE knowledge. Has anyone experienced a similar situation? Did you seek to build a new relationship or allow your current CPA the opportunity to learn?

[Joe Splitrock]

@Kristina Pearson it is hard to find a CPA that has not dealt with real estate, because most businesses and high net worth individuals own real estate. That being said there are incapable people out there that can only do basic taxes. Companies like H&R Block or pop-up tax preparation company, may hire people who don't even have accounting degrees, let alone CPA.

At a high level, business deductions and depreciation are basic concepts that any experienced tax professional should understand. Any time these posts show up on BP, all the accountants come running and say some of these things:

1. You need a tax strategist not just a tax preparer. The point here is that you want someone you talk to through the year to guide your strategy. There is good logic here, but I also wonder if it isn't just another revenue stream for accounting firms. I don't think you should need quarterly sessions for a small portfolio. Maybe one session to establish a strategy, then the ability to email questions as the come up (without being billed). My CPA takes questions any time I reach out to him and I only get billed for my taxes.

2. You need an investor friendly tax professional. I think there is danger in believing just because someone is a self proclaimed investor friendly tax professional, that they are any more qualified than the next person. They may not even be an accountant. Also keep in mind that it is rare a tax return only includes real estate investments. Small business, stocks, W2 income and other forms of income are usually mixed in. That means even an "investor friendly" tax professional needs to understand other areas of tax law. 

3. You get what you pay for and lower cost accountants give you lower quality of advice. This can be true, but it can also be false. Sometimes costs have more to do with overhead than they do quality. You may hire an accounting firm that operates out of a high rise in a coastal city, with five layers of management and high end amenities in the office space. Compare that to a sole proprietor who works out of a home office in a low cost city. Both could be smart and educated, but one may charge twice what the other charges. 

4. It may cost more for me to do your taxes but I can save you money through more deductions. There is a tendency for some tax professionals to over-hype the available tax deductions for a real estate professional. They try to create this idea that hiring some wizard accountant will save you thousands, when in reality anyone doing their job property has access to the same deductions. The ones who push it farther with more deductions are often using riskier tax strategies. They may claim that they can defend their position to the IRS, but you are better off never having to defend it in the first place. 

5. You don't need a local tax professional. Although it is true that you can work with people virtually, there may be some reasons you want a local professional. If you have to file state income taxes, you want someone familiar with state laws. No big deal if your state doesn't have taxes, but could be huge in states where they charge high state taxes. There is also a benefit to meeting people face to face. Giving your business to a local tax preparer supports local business and can even lead to business opportunities. For example, your accountant may know someone who is selling properties and can make an introduction. The advantages of not restricting yourself to local can be lower cost and higher expertise. You may find someone who operates in a low cost part of the country. Since most communication is via email, text and phone, they may feel just like they are next door.

6. You don't need a CPA. This is technically true but also scary. You don't even need a high school degree to prepare taxes for someone. I personally like working with a CPA, because I know the barrier is high to getting that designation. It requires accounting education and testing. That being said, someone with a University accounting degree can do the job too. Just be aware there are people with two year accounting degrees and even people with no formal accounting education out there doing taxes. Some of them don't even grasp basic accounting or math principals. Ask for credentials. If may feel a little strange to ask for their degree, but it is very important.

No matter how recommended, credentialed or how many properties they own, make sure you check your taxes and ask questions when things don't make sense. There are plenty of hacks out there masquerading and experts. Some are taking risky or illegal deductions. Remember that you sign your taxes, so saying "my accountant did it" isn't a defense.

@Dave Poeppelmeier that is shocking that you had a CPA who didn't depreciate property. Depreciation is used in all forms of business and it is a basic concept that would be covered on a CPA exam. Are you sure they were actually a CPA and not just working at a tax company? Sometimes people use the term CPA to generally cover anyone who works at a tax or bookkeeping firm, but many of these people just have high school degrees and no formal accounting schooling.