How to test your CPA's technical competence

Question

One of the most common frustrations when choosing a real estate savvy CPA is not knowing how to tell whether he knows his stuff. Here're some sample questions to test his technical competence, in any order:

• We're making $200k in salaries between myself and my spouse. Can we reduce our taxes with tax write-offs from rental properties? (Answer: no)
• If we hold a rental property for 5 years and it doubles in value, is there any way to not pay capital gains taxes when we sell? (Answer: yes)
• If we buy fixer-uppers to rebuild and sell, and construction takes more than one year - will our profit be taxed as long-term capital gain? (Answer: no)
• Can we lend our IRA money to other real estate investors? (Answer: yes)
• We both have full-time jobs. Can we qualify as "real estate professionals" if one of us obtains a Realtor license? (Answer: no)
• If we buy new appliances for our rental property, can we deduct the full cost of appliances right away? (Answer: yes)
• If I had a rental property for 3 years and never claimed depreciation, can I fix this mistake by filing amended tax returns for the last 3 years? (Answer: no)
• Can I deduct 100% of the property taxes on my rental properties if they are higher than the new tax law limit of $10,000? (Answer: yes)
• If I own my rental property free and clear, and I then get a mortgage against this rental and use the money to buy a boat - can I deduct interest on this mortgage? (Answer: no)
• If I convert my old house into a rental for 2 years, and then I move back and live in the house myself for 2 more years, do I have to pay any taxes when I sell it? (Answer: yes)

Of course, the answers above have some exceptions, like almost any question. But then the CPA should say something like: usually yes (or no), except in some special cases.

Pat L. · Answer

My favorite !!!!

Michael Plaks · Answer

Because after 2 years of incorrect or missing depreciation, correcting it becomes "a change of accounting method" and requires a different procedure to fix: Form 3115.

Sean Graham · Answer

Excellent summary, Michael. Regarding #7, missed depreciation, including accelerated write-offs from a retrospective cost segregation study, can indeed be claimed in the current year via Form 3115, often without amending prior returns. This is a critical point for many investors.
Form 3115 lets you catch up all missed depreciation in ONE year.

That catch-up adjustment is called a §481(a) adjustment.

IRS allows:

• - One-time depreciation “catch-up.” - Without amending prior returns
• - One-time depreciation “catch-up.”
• - Without amending prior returns

• - One-time depreciation “catch-up.”
• - Without amending prior returns

- One-time depreciation “catch-up.”

- Without amending prior returns

Lastly, the entire missed amount hits this year’s tax return.

Account Closed · Answer

Well sure. I don't do anything fancy, but I had a heckova time finding a CPA that could follow what I do

I buy using Subject To and Land Contracts and I do a Sandwhich Lease Option depending on the property and the state and I sell to Tenant Buyers on a Lease Option (or Land Contract if Texas). The Tenant Buyers give me a generous non-refundable Option Fee ($20,000+-) and I cash flow the properties. I don't have Cap EX since they maintain the properties. I enjoy the tax write offs, depreciation and principal pay down.

Some of the properties I sell as Turnkeys to out of state (California) investors who sometimes use CA LLCs while other properties enter my personal inventory until there is sufficient equity to do a refinance and pull the equity out.

Occasionally a Tenant Buyer exercises their Option and I use the proceeds to purchase another couple of properties or travel depending on my mood. Occasionally I'll find a property that has enough equity but needs to be rehabbed and I assign it to a fellow investor for cash or I take it on myself as a rehab project if it looks like a super deal.

Occasionally I'll have a Tenant Buyer choose not to complete their Option Agreement and I wind up reselling to another Tenant Buyer for the same Option fee and same cash flow or Selling as a Turnkey like the two that have just become available.

Sometimes I do training for a yearly fee and other times I do a Joint Venture depending on the student and the state. Ownership ratio is determined based on the goals of the student and the likelihood of future projects together.

Most, but not all of the properties are long term and will pass onto my kids on a stepped up tax basis.
I know that is all pretty general information but just finding a CPA who doesn't glaze over as I explain what I do was a challenge.

Michael Plaks · Answer

My question intentionally referred to amending old tax returns, and the answer would be no. This is a good, if a little sneaky, test of professional competence in the real estate niche.

Yes, you described the correct solution to missed depreciation.

Michael Plaks · Answer

Actually, I am fairly relaxed. This may be one of the advantages of being an EA vs. a CPA. :)

It might be received better if you explain the difference, because for me to do it would be, well, self-serving. Thanks in advance!

That said, I don't see the designation distinction to be all that important. There're excellent professionals (as well as the other kind) with either designation and even without any.

Michael Plaks · Answer

Account Closed

I invited you to add some good test questions. Instead, you described your investment approach and complained about difficulty of finding a knowledgeable RE accountant.

I'm not sure where you were looking, but this forum features 20+ of tax experts, including myself, who speak real estate fluently. Any of us could help you, I believe. Glad to hear that you did find one.

Account Closed · Answer

Relax. I'm agreeing with you. I'm trying to keep the thread going for you. This isn't the kind of subject most investors are salivating to understand. No offense intended.

Also, most people have no clue what the difference between an EA (Enrolled Agent) and a CPA is. perhaps you could explain in your own words where an Enrolled Agent makes sense over relying on even a very competent CPA. I've used EAs and found that to be a better choice than a CPA for certain aspects of investing. Successful investors need to know why.

Account Closed · Answer

Good stuff. And these are the easy questions.

How to test your CPA's technical competence

How to test your CPA's technical competence

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