My CPA "to increase Net Worth, you must pay taxes"??

Question

Hello BP family!! I have been reading a ton of books lately just like @Jesse East (Tax strategies for the Savvy Real Estate Investor & Advanced tax strategies...) I have been anxiously awaiting my turn to talk to my local CPA (recommended by many folks around in the town) although I am not convinced he is a CPA that focusses or is savvy on Real Estate Investors and tax strategies to help.

So here is my Question for all the experts out there, before I go crazy....

This is my first year in Real Estate Investing, I retired from the Army about a year ago, bought my first property before I got out (3 Plex) I live upstairs and have 2 Vacation Rentals below, then bought a single family home (SFH) (rehabbed and staged as another Short-Term Rental (STR)), then bought another SFH and set up as STR, and did this again.... So within the first year, I have a total of 5 Active STR's + a warehouse (small income from renting space out to occupants), and a church (still renovating but had a little income from liquidating some contents). The Way I see I should be able to get down to a very low (if any) tax burden. I have spent tons on rehabs, upkeep, and setting up these spaces.

I have income from Military Retirement, a current W2 job, the Vacation Rentals, cashed out some of my 401K to get going (which I believe is showing as income).

I have expenses from running all the rentals, all utilities, all upkeep (cleaning + maintenance), furnishings....etc.

I am reaching out to tax strategists now and have an initial call with @jacob peace in a few days.

Am I crazy for thinking my CPA is not Real Estate Tax Savvy if he is telling me I should plan to pay taxes to grow wealth? @Natalie Kolodij do you have any input?

Alexander Szikla · Answer

Seems like you need a new CPA. Taxes are paid when taxable events occur.

Selling a property (or stock/bond) creates a capital gain which is a taxable event - but you can increase your net worth without creating a taxable event.

For example, appreciation that is never locked in or refinancing and redeploying are not taxable!

Brian Boyd · Answer

@Eamonn McElroy Is right. You have to capitalize and depreciate the expenses. It may behoove you to seek other opinions from professionals. I have no qualms about do so personally. Good Luck to you.

Eamonn McElroy · Answer

Wayne is right that improvements are generally capitalized and depreciated. So, if you're expecting to expense tens of thousands in rehab expenditures that is probably the disconnect.

Make sure your CPA understands the unique treatment and opportunities surrounding STRs and warehouse space. As well as opportunities surrounding rehabs.

But -- to answer your question directly...you probably shouldn't be paying a huge amount of tax. However, to expect to pay zero, or very little tax, is probably unreasonable.

Ashish Acharya · Answer

I would recommend working with a specialist as not RE taxation gets complicated real quick. Also, I wouldn't recommend trying to show a huge loss as you might not qualify for the loan in the future because lenders will look at the tax returns.

Joshua McMillion · Answer

@Jason Krivickas

Congratulations on retirement! I have nine years left and am starting my REI journey. My opinion, don't limit yourself to a local CPA, follow your gut. I went with a CPA that was a veteran, invested in real estate, and specialized in real estate that was recommend to me in my military mastermind group.

Just completed my taxes and paid significantly less than expected.

Sincerely

Josh

Greg O'Brien · Answer

@Jason Nazarenko that is his mindset but seek other opinions. That’s lazy advice by them in my opinion

Wayne Brooks · Answer

Not sure what your CPA exactly means by that, no opinion. But, your rehab expenses are not immediately deductible, they get depreciated.

My CPA "to increase Net Worth, you must pay taxes"??

My CPA "to increase Net Worth, you must pay taxes"??

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