Summary: Hiring a tax accountant for your real estate business can seem like a black box. Is it okay to use your regular tax accountant, or do you need someone who is focused only on real estate? When screening a real estate savvy accountant, how do you know they’re the right fit for you? In this post, we share some of the knowledge we’ve gathered from spending hours and hours speaking to different accountants about real estate taxes. We hope this gives you a better sense of what type of accountant you need to partner with for your real estate investment business.
When reflecting on their “team,” most real estate investors immediately think of their investor agents, their lenders, and their property managers. What some miss is that a certified public accountant (CPA) or equivalent is an incredibly important member of your team.
Most people think of their accountant as a tactical person who just gathers up the data that they provide and enters the right numbers in the right places to make sure they pay what they owe in taxes, aka a number cruncher.
When you have a real estate business, or any business though, you don’t need a tactician. You need a strategist.
What you need is an accountant who understands your situation and sits down with you to proactively plan the best way to conduct your business. You need someone to help you think through your expenses and potential different scenarios to maximize your tax efficiency.
The truth is this: a real estate savvy accountant will save you enough money to pay for themselves multiple times over.
Because of this, I don’t mind paying my accountants well. In fact, this year will be the first year that I pay my accountants five figures. And I’m ok with that. I know the value that they bring outweighs their cost if they truly act as strategists.
But how do you know that your accountant is the right one? Let’s find out!
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Do you need a regular accountant or a real estate specialist?
Once you are a business owner, not just a regular taxpayer, a wealth of tax incentives (some call these loopholes) become available. Your taxes go from a simple sum game with minimal write-offs to complex, with multiple iterations and opportunities to harvest incentives.
You can imagine what a regular CPA faces when you suddenly go from just having your work income W2 to deal with to having that plus five properties.
And then you add in property-related activities. Some properties may have major rehab projects, some may be purchased in different tax years than they are put in service. You may have to decide if and when you want to complete cost segregation studies. You may decide to buy some as part of partnerships. The possibilities are practically endless.
On top of that, there is the fact that the tax rules change each and every year. This year, for example, the CARES act sweetened the pot for real estate investors. If you don’t have a CPA who stays on top of real estate-related changes, missing the net operating loss carryback itself could cost you thousands to tens of thousands of dollars.
This is all to say: if you are a real estate investor, you must have an accountant who specializes in real estate.
Doing so will make you money. Seriously.
Questions to ask a potential real estate savvy accountant
So now that we’ve established that you need an accountant who specializes in working with real estate investors, what types of questions should you ask to find out if that accountant is the right fit for your business?
#1 What percentage of your clients are real estate investors?
The first screening question I recommend asking is what percentage of the accountant’s clients are real estate investors and what percentage of them are claiming real estate professional status.
If the accountant comes back and says 5-10%, I think the answer about whether you want to work with him/her is probably pretty clear. But what if the answer is 50%?
Your cut-off percentage may likely be different from mine, but if an accountant has at least a third of their clients claiming real estate professional tax status, I’ll pursue asking deeper questions to understand how he/she approaches taxes.
#2 Do you own investment properties yourself?
Although this one is not a deal-breaker, I love to hear when an accountant owns his/her own properties, because it tells me that he/she knows what it’s like to be an investor. To me, it means that the person has thought about deductions and expenses deeply, from the point of view of the investor. So it’s a major bonus point when it’s the case.
#3 How much time do you spend with your clients working on their strategy?
As I mentioned above, you want a strategist for an accountant, not someone who just plugs in numbers. The ideal situation is where you can sit down with your accountant frequently (at least quarterly) to discuss your situation, what’s changed since last time you got together, and proactively plan for how to maximize your tax savings.
You also want an accountant who you can shoot questions to in between sessions and get quick answers if you need them for decision-making. Believe me, this is not as commonly available as you might think.
Because of this, when I first interview an accountant to determine if they’re real estate savvy, I always find out if this type of personalized touch is available and how much it will cost me.
#4 How do you approach deciding what should be depreciated vs written-off using de minimis safe harbor?
This is an advanced question, so if you don’t understand what these things mean, I’d skip this one when talking to accountants. Since it’s one I commonly ask, though, I wanted to introduce it here for all of you who are more advanced investors.
In brief, there are two ways to approach writing off repairs and upgrades you make to a property. The first is by using de minimis safe harbor. De minimis safe harbor rules allow you to write off repairs that cost under $2500 immediately. So you have an immediate loss on your taxes, sheltering your income if you have REPS (which, as a bonus, isn’t recaptured in the future).
The second way you can write off a rehab project is by depreciating most of the improvements over time. Each component has its own pre-determined life and depreciation schedule. So, if you use depreciation, you’ll often end up writing off a portion of the cost of an item over years rather than immediately (although you can use a cost segregation study after a rehab to speed that up using bonus depreciation).
As a real estate investor, it’s ideal for you to get as much money in your pocket this year when you file taxes as you can, because then you can use that money to invest next year. The power of compounding means that each dollar you get in your pocket now turns into more money much faster since you can get it working for you sooner.
Therefore, I like to ask how an accountant thinks about using de minimis safe harbor vs depreciation with larger rehab projects. It helps me see how he/she thinks.
When you ask this question to an experienced real estate investor accountant, you’ll often get a nuanced answer, with details about how he/she approaches what counts as an improvement and what counts as a repair. You’ll get to see his/her reasoning process and read of the law. You’ll hear about the methods he/she uses to maximize your tax savings.
If you ask this question to a non-experienced accountant, you’ll get a shallow simple answer. It won’t have any strategy or thought behind it. You’ll be able to tell that the accountant isn’t thinking about how to maximize tax savings for his/her clients or he/she just doesn’t understand the tax details of real estate.
That’s why I find this question to be such a great way to differentiate real estate savvy accountants.
#5 How do you approach AirBNB and short-term rentals?
This question is only relevant to those of you who have or are planning to buy a short-term rental, but it’s a super important one to ask if you’re in this situation.
Why? Because different accountants view short-term rentals differently.
Some see them as hotel-equivalents. This is good if you don’t have real estate professional tax status since it means you’ll be able to use any losses to shelter income. This status, though, also comes with downsides, which are beyond the scope of this article to discuss.
Some accountants, however, read the tax code to allow for Airbnb type rentals to be equivalent to long-term rentals if you don’t provide “hotel-level amenities,” which means if you’re trying to get real estate professional tax status, you can use the hours you spend managing your short-term rental as material participation hours.
Now, I’m not an accountant, so I can’t explain to you which approach is necessarily the right one. And, probably, it’s not going to be truly delineated until there is case law either way. But, if you do have a short-term rental, it’s important to hear where the accountant lands and their reasoning so you can see if it makes sense to you and if you want to work with them.
#6 Do you offer bookkeeping services. If so, how do they price their services?
A lot of real estate investors do their own bookkeeping.
In fact, I would encourage all of you starting out to really consider doing it because it allows you to track your properties’ performance month to month and have a clear vision of your expenses and income. When you do this, you become the CFO of your business because you are able to identify patterns and make changes to make your business perform even better.
As an added benefit, you’ll also catch your property manager’s errors. Believe me, there will be some. Every year that I did bookkeeping I was able to identify hundreds of dollars worth of errors.
Finally, a third benefit is many real estate savvy accountants will count time spent on bookkeeping as material participation hours if you are involved in the day to day management of your property. Be sure to ask your CPA though, since different CPAs approach hours spent on bookkeeping differently!
It’s common for accounting firms to offer bookkeeping services to their clients. Often these will range around $85-100 per hour. If you’re organized and deliver your bookkeeper’s data well, you can reduce how many hours you need.
Some accountants charge a flat fee per LLC, which can get incredibly hefty when you have a lot of properties or if you invest in single-family homes.
The range of what one business will change vs the next varies considerably. We’ve been quoted from $1,000-3,000 per month for our properties. The quality of bookkeeping can also vary.
One benefit of having a real estate savvy accountant who also offers bookkeeping services is that you can probably assume that the company is training the bookkeepers to approach doing the numbers with an eye towards maximizing tax benefits. If there is ongoing training and communication between your accountant and bookkeeper, they may be able to strategize how to maximize your tax efficiency because they’re both seeing the numbers as they come in.
If this is the case, though, I’d still advise you as the business owner to be very involved reviewing the books and actively thinking about tax implications. Ultimately you must be the CEO and CFO and COO of your real estate business until you grow enough that you can hire for those positions, that is!
#7 Do you have an International tax arm? Do you have familiarity with clients on visas?
If you are in the US on a visa, you own or plan to own international property, or you are a US citizen living internationally, you definitely want to find an accountant who can help you strategize given your particular situation. If that’s the case, make sure you bring that up early on in the conversation because, like familiarity with working with real estate investors, an accountant’s experiences and knowledge will vary greatly.
A quick note on what you don’t need from your accountant
Now that we’ve discussed what you should look for in a real estate savvy accountant, I want to quickly cover what you don’t need.
A local accountant
First, you do not need a local accountant. There is no reason that you need an accountant located down the road from you. A zoom planning session is just as good as meeting up with your accountant in person. And, it’s a shame to undermine the criteria of what you want in an accountant just to get a local person. You want the best person for the job, not just whoever is available nearby.
A cheap accountant
Second, you do not want to get the cheapest accountant out there. In order to get a strategist and to get someone who spends time with you to make sure your tax planning strategy is individualized to what you need, you’re going to have to pay. To give you a sense of cost, we’ve consistently paid in the $5,000-6,000 range to get our taxes done since we started investing. This year we’re paying $10,000. We also know real estate investors who pay over $50,000 for the big names.
I’m not suggesting that you need to spend that much money. But, once you become a serious real estate investor, your days of paying $600 to a CPA or doing your own taxes are done. It’s not worth the amount of money you’re going to lose in potential savings. And, if you’re doing your own taxes, it’s just not worth the risk in my opinion.
It’s time to go find your real estate savvy accountant!
Now that you know what we look for in a real estate savvy accountant, I want to leave you with one last piece of advice.
When you are a real estate investor, taxes are seriously FUN. I’m not kidding. There’s nothing that I get more excited about (well maybe besides cashflow and forced appreciation) than maximizing tax efficiency.
Therefore, I highly suggest you work on your mindset about taxes (is it possible taxes are fun?!?!) and then start educating yourself before going to your CPA. The more you can learn, the more questions you can come up with, the more knowledge you bring to the table, the more exciting taxes will be–and the more money you will save–because you will see opportunity everywhere.
There are lots of engaging tax books out there for real estate investors. I highly suggest starting with Amanda Han and Matthew MacFarlane’s Tax Strategies for the Savvy Real Estate Investor or Tom Wheelwright’s Tax-Free Wealth. Once you’ve read one or both of these texts, you’ll want to know more. Believe me!
Do you have other great screening questions for CPAs? Join our Semi-Retired Facebook groups and come tell us about your real estate accountant experiences!