It is a new year. That means resolutions, new goals and plans and of course income taxes. April 15th is not that far away. There are many income tax benefits to the real estate investor. Getting them however can be a bit daunting and definitely time consuming.
There are 1040’s, 1065’s, Schedule E’s, Schedule C’s, Schedule SE’s and many, many more forms to be filled out. It can all seem incomprehensible, especially to the new investor. In my experience, tax preparation is not difficult, but it is rather time consuming. Despite the time factor, I would suggest that all investors, especially newer investors, learn how to do their own taxes and prepare their own taxes to the best of their ability at least once. Doing so, I contend, has several benefits.
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Why You Should Do Your Own Taxes
- You gain a real understanding of the cash flow of your business. Yes real estate investing is a business and it is all about cash flow, positive cash flow. Doing your own taxes forces you as a business owner to sit down and sort through what came in and figure out where it went. You may see ways to improve your business that you had not seen before.
- Understanding how your taxes work will help you with your investment decisions. You will have a greater understanding of the tax implications of any investment decision.
- Preparing your own taxes will make you keep a better tracking system of income and expenses. Just dropping all your receipts in a shoe box until the end of the year is no way to run a business. When you have to sort through all those receipts and remember what you purchased and why from last February, believe me you will vow to get a better system and that will only help you.
- Preparing your own taxes will make you confident when you have to explain them to someone. As many of you know, anytime you ask a bank for money they want to see your tax returns. Sometimes, bankers do not know exactly what they are looking at and how the money flows. If you have the ability to sit down and explain it to them, imagine how that looks in the banker’s eyes.
- It may save you money. Tax preparation is not cheap. It can cost several thousands of dollars, especially when several entities such as LLC’s or other corporations are involved.
Tips for Preparing Your Own Tax Returns
If you want to try doing your own tax returns, be sure to do the following.
- Educate yourself using one of the many fine manuals out there that explain tax procedures. You can almost follow along line by line on the tax form with these manuals.
- Get a book specifically designed to answer tax questions for the real estate investor. There are several good ones out there.
- Use some of the tax software that is available if your returns are not overly complicated.
- Have a knowledgeable CPA or other tax preparer that you can ask a question when you get stuck. You may even get that person to review what you have done.
- And finally, don’t cheat. Be honest and prepare them to the best of your ability. If you don’t know how to do something, ask a competent professional. Understand what your limits are.
As your business grows the time will come when it will no longer make sense for you to spend the time with tax preparation (my tax returns last year were 90+ pages for example!). As they get more complex, you may actually cost yourself money by doing them yourself. However, think of how much ahead of the game you will be with your accounting systems and knowledge. Your tax preparation costs will be significantly reduced if the preparer does not have to sort through a shoe box full of receipts.
So, let me know with your comments. Do you do your own taxes or hand the CPA a shoebox? Did you do your own taxes yourself when you started out as an investor? Did you find doing them beneficial?
Photo: Old One Eye