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Should real estate investors prepare their own taxes or hire an accountant? Utilizing professional tax advice is a foundational financial habit, which is why this is the first step on my list of ways real estate investors reduce taxes. As a CERTIFIED FINANCIAL PLANNER™ who works with real estate investors, I encourage all my clients to use a real-estate savvy tax professional for both tax planning and tax preparation.
You don’t see many millionaire business owners doing their own taxes, but for some reason lots of real estate business owners start by going it alone. That may be because many real estate folks are hands-on, DIY entrepreneurs. However, a tax professional who is knowledgeable about real estate -- and preferably has real estate investing experience themselves -- will save you time, money, and headaches.
The Benefits of Ongoing Tax Planning
Your tax advisor can offer the most help if you talk throughout the year. Checking in before you make decisions, such as selling a property or starting a renovation, will help you identify tax planning opportunities. My husband and I meet with our CPA (Certified Public Accountant) at least once outside of tax preparation time to discuss tax planning topics such as:
- Income projections for the year
- Property purchases and sales, including any 1031 exchanges
- Business profit and loss
- Retirement plan contributions
- Charitable gifts we intend to make
- Estimated taxes
Tax Planning Questions From Real Estate Investors
In my financial planning practice, I often initiate or participate in tax planning discussions with clients and their CPAs. Some recent discussion topics include:
- Weighing the pros, cons, and tax implications of a partial 1031 exchange of highly appreciated property
- Reviewing best practices to implement a series LLC structure
- Determining whether a vacation rental should be reported on Schedule C or Schedule E for clients who managed furnished 30 day rentals
- Figuring out the allowed retirement plan contribution for a real estate professional
- Doing a pre-file review for clients who sold a primary residence, which they rented out on Airbnb during the pandemic
- Discussing tax treatment of interest expense for a client who used a personal home equity line of credit to fund the purchase of an investment property in an LLC
Types of tax professionals
Tax professionals have different levels of expertise, skills and education (See IRS guidance). When looking for a tax professional, ask if they can:
- Prepare federal and state tax returns
- Give you tax advice
- Give you legal advice
- Represent you before the IRS for an audit, payment/collection issues, and appeals
- Help you plan for opportunities to minimize taxes as well as prepare for and understand taxes owed
- Work with you and your other financial and legal advisors to grow and scale your real estate business
Tax preparer - Anyone can hold themselves out as a “tax preparer.” The IRS requires that people who are paid for tax preparation have a Paid Preparer Tax Identification Number (PTIN). If you have simple filing requirements and do not directly own rental properties, but want help with forms, this may be a fit.
Enrolled Agent (EA) - An Enrolled Agent is “a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee.” Consider an EA if you want help with tax preparation and filing, as well as maximizing deductions for your rental properties, but do not have ongoing tax planning needs.
You can find an EA in your area through the National Association of Enrolled Agents.
Certified Public Accountant (CPA) - A CPA is a licensed accounting professional who can offer tax and financial advice to individuals, businesses, and non-profit organizations, and represent you before the IRS. A CPA has met education, work, and examination requirements, including passing the rigorous Uniform CPA exam. A CPA who has the CPA/PFS designation also has knowledge in personal finance topics.
Consider using a CPA when you;
- are looking for a tax advisor who will help you with ongoing tax planning
- have complexity in your personal finances
- want to optimize your accounting and financial operations
- are doing major tax projects such as a cost segregation study
CPAs are licensed by state. To find a CPA who specializes in real estate investors, ask your financial planner or investor friends for referrals. Search the discussion threads in your state’s forum on Bigger Pockets, as this is a frequently debated topic.
Tax attorney - A tax attorney can help you navigate and comply with the complexity of federal, state, and local tax codes, and help you take legal advantage of exemptions, deductions, and credits. Consider using a tax attorney when you need:
- To optimally structure a real estate transaction, such as a development project, opportunity zone, or condominium conversion
- Handle a legal issue related to taxes
- Have a complex 1031 exchange
- Are establishing a private real estate investment, such as a syndication.
Does your tax professional own real estate?
Make sure to ask a potential tax professional if they have personal experience in real estate, including:
- Owning investment property
- Tax preparation and planning for different types of real estate investors, including residential and commercial properties
How much does a professional tax advisor cost?
Tax preparation costs vary, depending on complexity, and can range from a few hundred dollars for a simple 1040 to thousands for a complex return with multiple rental properties, 1031 exchange, stock option exercises or business sale. My personal tax returns typically cost about $2,000 annually. Tax consulting/planning with a CPA can range from $150-$500 per hour.
Improve your own tax knowledge
When your CPA talks, does it all sound like jargon to you? You will get the most out of your relationship with your tax advisor if you know basic terms and concepts. Check out some of my favorite educational sources for improving real estate tax knowledge:
- IRS Real Estate Tax Center
- The Real Estate CPA blog and podcast
- Nolo Press Legal Encyclopedia - Landlords and Every Landlord’s Tax Deduction Guide
- BiggerPockets Book on Tax Strategies for the Savvy Real Estate Investor
- Stessa Blog - Taxes and Legal
- Spark Rental Landlord and Real Estate Investing Blog (search “tax”)
Real Estate Investors - Use a Tax Advisor
If you’re a real estate investor, please use a professional tax advisor! A professional tax advisor who is knowledgeable and experienced in real estate will reduce your tax stress, help you comply with a complex tax code, and save you money and time.
This blog is for general financial education purposes. Information contained in this blog should not be construed as financial, tax, real estate, legal or investment advice. For educational purposes, blog posts may contain links to other websites which are not under the control or and are not maintained by Real Life Planning. Real Life Planning has provided those links for your convenience but does not necessarily endorse all the material on those sites. Please consult your financial, real estate, legal, or tax advisor for advice specific to your situation.