Dealing with Capital Gains Tax / RE Accountant?

Question

I purchased a home in November 2017 and am putting it on the market March 1st - assuming that it sells fairly quickly, I'll have owned the house for under 2 years and will have to pay capital gains taxes (for reference, CT house purchased at 91k, ~25k in repairs, listing at 170k - I'll be probably renting a place to live in myself as soon as a deal goes through, then looking to purchase a multifamily to rent out within 6 months or so, but very unlikely immediately after closing).

I have a sort of two-part follow-up question about this, which is rooted in the fact that I know very little about capital gains and am feeling overwhelmed every time I try to Google/BP search the topic. To start, does anyone have a solid, comprehensive, and easy-to-understand source for me to get started on?

On the other hand, is this something that most folks end up having a conversation with their RE accountant/lawyer about? I have neither and am nervous about paying $100+/hour to get advice that I could theoretically learn myself, but I'm guessing I should probably start building these types of relationships as I dig my feet deeper in REI...?

I appreciate any advice y'all can offer!

Ashish Acharya · Answer

@David A.

If you hold onto the property until November 2019, you will completely avoid capital gains taxes. You will fall under section 121 capital gain exclusion for the sale of the primary residence. I am assuming that this is not a rental property.

If you can’t wait that long, based on your number a rough estimate of your capital gain is 54,000 without any selling expenses. I am also assuming that the repairs  were actually improvements to the house. Because repairs do not increase the basis of the house, only improvement does.

Depending on your income level you might pay either 0%, 15% or 20%

If your taxable income (not gross income) is below around 425k with capital gain, you will pay 15%.

You’re right. Professional are expensive. But some transaction requires professional help.

With the same logic, I could go to the medical school and figure out the rashes that I have on my body rather than going to the doctors.

Sometimes I think the same way then realize others people think as I do, and pay thousands of dollars more in taxes because they don’t talk to Professionals. So, I go to doctors. :-)

Dan Weber · Answer

I am in the exact same situation and will be filing my taxes this year to reflect the sale of my duplex that I owned for less than two years. I have @Nicholas Aiola doing my taxes and helping me through the process, I would suggest reaching out to him.

Nicholas Aiola · Answer

@Daniel Weber Thanks for the mention!

@David A. I have a love/hate relationship with online research and self-help. On one hand, it's great to push yourself to learn about things you may not have encountered before; on the other hand, information found online can often be provided by people who don't know what they're talking about. I can write and publish an article tomorrow about how to do heart surgery but that doesn't mean I actually know how to (I don't).

I think you'll find that most service professionals catering to the real estate industry have moved away from hourly billing. We certainly have because it's counterproductive to an effective relationship. I would recommend reaching out to a few CPAs (those on this thread are a great start) and see if there's a good fit for you. I assume most, if not all, offer a free consultation or introductory call.

Good luck!

Eamonn McElroy · Answer

@David A.

You should do what you're most comfortable with at the end of the day.

That said, one of your worries is that you'll pay a CPA "$100+/hour to get advice that I could theoretically learn myself".  Usually with compliance engagements the CPA won't be billing you hourly to explain your return to you.  The engagement is usually fixed price and the wrap up convo is built into the fee.

If you're thinking about a consulting engagement, yes, those are usually hourly, but not a lot of CPAs/EAs are going to "teach" you how to prepare your own return correctly, even for a fee.  The liability exposure is materially higher and it's not the trade or business we're in.  To use an analogy, a mechanic shop isn't going to teach you how to repair your car.  Their line of work is fixing your car.

Most competent CPA's billable rate will be much higher than $100 an hour.  When I was back in Memphis, which has a lower cost of living than Atlanta, they were assigning fresh out of college, entry level accounting grads (most which didn't have a CPA license yet) a billable rate of  around $150 an hour.  As previously noted, compliance engagements are usually flat rate and agreed upon before work commences.

I think what needs to be understood with a DIY tax prep mentality is that you don't know what you don't know....

Suppose your engine blew up.  A DIY mentality would dictate that you purchase repair books from Autozone, watch hours upon hours of Youtube videos, buy tools you need but don't have, and probably still throw your hands up in the air and have it towed to a garage because it's overwhelming.

A tax return on the other hand is like the tip of an iceberg.  Most of what you don't know is unseen and you don't know it exists.  This I think leads to false confidence for most DIY preparers.

Could you do your own tax return?  Maybe, but one thing is certain, you'll need to devote material time to educating yourself and building up your tax "hat".  Could that time be better spent elsewhere?  Maybe...

Frank Chin · Answer

If I were you, plan on REI for the long haul, get hooked up with a knowledgeable CPA ASAP.

I don't know what your background is. I have an MBA in finance, afterwards took courses for a certificate of RE, which included courses in RE accounting, and even one for RE agent licensing. Even with all of this, I used a CPA. At one point, I own a businesses besides owning rental properties.

Early on, I used a CPA. When he decided to switch fields, closed his office, I decided to save some money and be on my own for a few years. Then things got busy, the wife convinced me to get a CPA. Found one, but in the few years I didn't use one, there were deductions I missed, long story, and that cost me more than the fees  saved.

Don't know how big an investor you plan to be. When I had my other (non real estate) businesses, we have so many other issues to deal with, such as workman's comp, disability insurance, quarterly employee withholdings and federal and state returns to file that it was overwhelming. Yes, I did my own bookkeeping, but having the CPA involved and able to answer questions was not only a great time saver, but gave me confidence that I could take on this aspect. When I had my rentals, and the businesses, he charged me $175.00 a month, with me doing the bookkeeping, supply him the numbers, and a few  hundred to prepare the tax returns, that's personal plus several corporate returns, which included a C Corp, S Corp, and LLC. I could call him at any time with questions, without the hourly fees.

But the biggest benefit is there is an error, and issues with the returns, in my case, I can say talk to my CPA. I didn't know they send state inspectors to come to check your business out and I got one come by for a surprise visit. She was very nasty, I can't lay my hands on all the info. I called the CPA, and he happened to know the inspector, asked her what she doing at my office, as he has all the info. When the inspector handed the phone back to me, apologized, and quickly left.

If you have an accounting background, taking a course or reading up on real estate accounting would help. When you acquire properties, you have to book the land and the building, so you have to know the land/building ratio. You have to know how to book acquisition expenses, what to expense, what to capitalize. Then you have depreciation, and depreciation recapture on the sale of the property. All in all, if you're new to this, it's a case of you don't know what you don't know.

When I started, I attended the local REI meetings, and they have CPA's coming by giving talks on various subjects, with the purpose of soliciting business. That's a good way to start getting to know who's around, though I didn't get my CPA that way.

Dealing with Capital Gains Tax / RE Accountant?

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