How do you find a real estate accountant?

Question

Jim Kennedy · Answer

I just noticed you mentioned secrecy.In addition to being an investor and a CPA, I teach tax at a local college. Here is how depreciation works. It is called cost recovery. In English, the Internal Revenue Code (the IRC) says you have to match expenses to the period in which they occur. For example, if you pay the 3rd quarter real estate taxes, or the March sewer bill, you write all that off because you got all the benefit - this year. So far so good, right? What if you buy a rental property for $150K - can you write that off this year? No, but nice try. The IRC states a residential property lasts 27.5 years. That means you can write off 1/27th of the purchase price (3.64%) each and every years. THAT amount is your annual depreciation expense. Got it? Good. Now lets dig down more:

What else did you get with your house? Usually land, right? Well, how long is the land good for? Nobody - even the IRS knows, so you have to back out a percentage of land (a long discussion topic for another day) and then get busy depreciation the remainder.

Bu t wait, we haven't discussed property with shorter lives and more front loaded depreciation. I not going to either in this post, because I want to let you (and other readers) really nail down the initial concept of depreciation, which hopefully is now not as mysterious as previously thought.

How much do I love real estate and tax and planning? Today's my birthday (same as Elvis and David Bowie - Jan 8). Its 8AM and my family is still asleep but I've been on BP for the last 90 minutes, reading, posting, sharing and learning. I am certainly in good company here and am grateful to @Nina Davenport for introduing me to BP

Jim Kennedy, CPA

Dave Holland · Answer

@Eddie L.

Yeah I think what you are experiencing is common. Just like attorneys, for example, if you don't use someone who specializes in what services you need you won't be getting the highest quality service.

If you want to use a local accountant, someone who you can meet face to face, maybe ask around at a local REIA group meeting. Or if you know other investors in the area ask who they use.

If you are comfortable with  scanning/emailing, phone and/or Skype meetings then there are quite a few (myself included) CPAs on BP that deal exclusively with real estate investors and are good options. Just like any other contractor you might use I think you should just talk to a few and see who you feel the most comfortable working with.

Hope that helps

Jeff B. · Answer

IMO, you get what you pay for - - hire a book keeper and that's what you get.

Want a professional that has a license to protect, hire a CPA.

There's nothing special about RE accounting and if the person you're talking to can't tell you the class life of appliances vs the property itself -  W A L K (no run) away.

I hate accounting, but it's possible to use the depreciation tables and file the 1040 and the Schedule E for yourself, but it's not recommended - - you become the book keeper that should not have been hired :giggle:

Jim Kennedy · Answer

I agree - you need a new CPA. I cant believe that nobody has offered you a solution to deduct all the deprecation you failed to over the past 4 years. If you didnt take depreciation, you lost out on an expense. Also it lowers the cost basis of your house whether you took it or not (the so called IRS "allowed or allowable" rule.)

I buy and hold in NJ and (until recently) Texas, and as I am a CPA I prepare hundreds of returns from local REIA members (SJREIA) and others  (DIG, HAPCO, etc).

What I am about to tell you is a big, big tax saver, and THAT is what you should be looking for when selecting your tax preparer. How would you like an $18,000 write-off? This is called a Section 481(a) adjustment. It will send others rushing to the Internet to find it, but my experience with these has led me to whole lectures to REIA's on this topic alone. It goes hand in hand with Form 3115 - change in accounting method. This is a serious matter in the eyes of the IRS. It is an eight page form. 6 pages are essay ('Im not kidding) and two are full of computations. Luckily we have developed standard language to tweak rather than starting from scratch each time.

I have taken writeoffs for various clients who under-depreciated their houses in the past.Done correctly, the amount can easily be 5 figures - 10K, 20K, 30K. Its fully documented and can hold up under audit.

How much can you personally save? I dont know. Depends on the cost of your house, but if it was, say, $150K, 4 years of adjustments taken this year could very easily be $18,000. And we haven't even talked about jacking THAT number up with documented cost segregation for tangible personal property! If you have questions, feel free to contact me.

Jim Kennedy, CPA

Steve Babiak · Answer

One challenge (that some get scared of) with a multi-unit where you live in one unit is how to properly divide up the property, because any expenses (including depreciation) that should be allocated to your live-in unit cannot be deducted. But as already posted above, if you don't take a depreciation deduction where you are entitled to, the IRS will later assume you did take that depreciation deduction when computing depreciation recapture upon sale of the property.

Eddie L. · Answer

Thank you everyone for the quick reply. is it a red flag if i didn't claim any depreciation for the last 3 years and all the suddens i claim that?

@Dave Holland i will definitely talk to you as soon as i get my W2 form. I need someone who's familiar with NY taxes.

@Sam Magina you are absolutely right i am reporting my rental property on my individual tax return. i am looking for an investor home now. i agree with you not a large amount. Uncle Sam is cheap. he wants every penny from us.

@Steven Hamilton II  i agree with you. i still with my current accountant before i bought my house. He just copy and paste almost everything from previous year except changing some numbers according to my w2 form. In and out within 15mins.

@Jeff B. Hi Jeff , i am not being cheap. my accountant is CPA with his license hanging in front of his computer. i try to learn and ask questions. He told me he was an auditor for uncle sam. this is red flag, that is red flag....etc. i am not trying to claim an arm and a leg. i only claim some donations which i actually have the credit card statements to proof it. Nothing else. i know there should be more. Thank god i bought this house and pay a lot of interest so i can get back more tax return. i didn't get back a lot claiming my kid. that's proving real estate is a right way to go.

Steven Hamilton II · Answer

Eddie,You need to find a new accountant for sure if there isn't depreciation listed on your tax returns.You definitely need someone qualified, does not have to be a CPA, could be an Enrolled Agent or an attorney. Just make sure they specialize in tax and have significant experience dealing with real estate investors.

Here is a great list of questions to ask a potential accountant: http://www.biggerpockets.com/forums/51/topics/70447-questions-to-ask-a-cpa

Also check out the www.NAEA.org page in your search. It should help you find someone local. If someone comes to me, I'll send them your way.

If you need help in your search or want to verify something don't hesitate to ask.

For example: I have clients worldwide and things are just as easy as I e-mail them, talking on the phone. I even use Skype and TeamViewer to communicate with clients so I'd highly recommend looking for one of the best with great references that interviews well with you.

So look for someone you can connect with that works out for your situation.

Feel free to ask here if you have questions

How do you find a real estate accountant?

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