Must ask questions when interviewing a CPA

8 Replies

Good morning all! Newbie here and my husband and I are ready to start forming our team. We have an appointment for a consult with a CPA this morning and another later this week so I wanted to see if there were some MUST ASK questions in determining if they will be a good fit? We live in Northern California and will be looking to invest in out of state rentals to build a rental portfolio. We would also like to do a few flips but haven’t decided if those will be done out of state yet. We are still deciding how we will finance our first deal - we have a 401k we could potentially work with, HELOC, as well as my parents providing funds for a down payment, so I’m assuming they will have to partners?? Any input would be much appreciated!

@Jamie Oie

Don't have all the facts here so I'm just covering the basics, but make sure they are familiar with all things related to rental real estate - depreciation, what gets capitalized versus deducted, basis, 1031 exchanges, depreciation recapture, etc.  If you're flipping rather than holding long term, might want to think about capital gains and losses in conjunction with other assets such as if you have investments with a broker.

Also might want to be sure they're familiar with out of state filings and requirements plus the state tax credit if you're looking to invest out of state.  Also, estimated taxes depending on your situation if you earn regular W-2 wages that have withholding but will need to pay in estimates to cover any profits from your rentals.

If you anticipate losses, make sure they are familiar with passive loss rules and the exceptions to allow you to deduct the losses.

If you're talking about your parents giving you money, be sure they're familiar with gift tax laws or how to structure it to ensure you can still deduct interest payments as a mortgage rather than personal debt (you might want to get an attorney involved here).

Looks like you're also considering some nontraditional financing methods, so whatever forms you're considering, ask about the treatment of the interest and debt payments related to that.  

Not sure how much it applies here but you could ask his/her opinion about shifting property tax payments and any other itemized deductions possible to your rental properties to be able to deduct on Schedule E rather than Schedule A since you're in a high tax state of California, though not sure what yours and your husband's other income and assets look like.  Taxpayers will be limited to deducting $10k in taxes on Schedule A under the new tax laws.

Also, side note but if you are looking at buying several properties you may want to look into creating an entity to limit your liability such as an LLC and possibly look into the 20% pass through tax rate with the new tax laws if that benefits you. You'll likely want to have an estate plan in place too if you don't have one already. You may very well benefit from speaking with a tax, real estate, or estate planning attorney here.

If you need names of attorneys or CPAs in San Diego let me know.  Good luck!

*None of this post is intended to create an attorney-client or CPA-client relationship.  Recipient should seek professional advice and is not to rely upon the comments in the post.

@Katie Lepore great info! Thank you so much!! This will help me get started as I'm not tax savvy at all :)

I would love some names of attorneys if you wouldn't mind sending them my way. Entity formation is next on our list so getting a knowledgeable attorney on board would be great.

Thanks again! 

The other thing you need to be careful with in the flipping stuff is being classified as a "dealer". I believe that 1 flip a year you're good, 2 is a gray area, and more than 2 in a year could get you bumped up to a dealer. That means self employment taxes. 

In terms of what to ask a cpa, I would first ask them how many clients they have that invest in real estate. And of those, how many invest out of state. How many flip and do rentals?

The other thing you need to be careful with in the flipping stuff is being classified as a "dealer". I believe that 1 flip a year you're good, 2 is a gray area, and more than 2 in a year could get you bumped up to a dealer. That means self employment taxes. 

In terms of what to ask a cpa, I would first ask them how many clients they have that invest in real estate. And of those, how many invest out of state. How many flip and do rentals?

@Jamie Oie

If an accountant gives you an advice like the one I quoted - RUN! It indicates someone who picked up some tidbits of information here and there and created superficial rules of thumb, but does not understand the fundamental concepts behind it. Very dangerous.

Also, asking how many REI clients they have hardly reveals anything. How many clients in your specific situation is a better question, but still not good enough. First, how can you verify? Second, what if they provide lousy service to a large number of other people?

I'll give you 3 test questions to ask.
1. I bought a house in January 2017 and will sell it in February 2018. Will I pay 15% capital gain tax on my profit?
2. I just spent $20k fixing a rental home between tenants. Can I deduct this $20k repairs on my taxes?
3. Can I save on taxes if I form an S-corporation?

Answering "yes" or "no" to any of these 3 questions indicates either incompetence or laziness. Or both. None of these questions can be answered without getting a lot of additional information from you first. So they should ask these questions before answering.

That said, technical competence is only one piece of the puzzle. I'd even venture to suggest it may not be the most important one. Start by determining what kind of help you're looking for. For instance:

  • preparing a tax return with absolutely minimal taxes
  • preparing a tax return with absolutely minimal IRS risk
  • preparing a tax return as fast and/or as cheap as possible
  • helping you understand your taxes
  • helping you organize your records
  • helping you improve your business practices
  • helping you optimize your future taxes by proactive planning
  • being available year-round to answer your questions
  • helping you to improve the outcome of your REI business
  • advising you on your overall financial issues
  • assisting you with IRS issues - letters, audits etc.

This list can continue. My point is - there is much more than technical competence and prices. Scope of services, business model, approachability, personality, attitude, and so on. While I'm proud of my technical savvy, I'm not the best choice for everyone. Certainly yes for some clients but not for others.

Good luck in your business and in your search!

Here is my famous post: https://www.biggerpockets.com/forums/51/topics/70447-questions-to-ask-a-cpa

@Jamie Oie

I like recommendations of professionals from people that are already  successful in what I am trying to accomplish. 

Thank you everyone! This is all very helpful :)

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