A good real estate certified public accountant (CPA) can help an investor structure transactions to minimize potential taxes while remaining compliant. At the end of the day, the amount of tax burden can have a significant impact on return on investment (ROI) when a property is sold and the amount of wealth retained over the long term.
In this article, we’ll discuss the benefits of hiring a real estate CPA, along with scenarios for using a real estate CPA.
Key takeaways
- A CPA can do things that an accountant can’t, such as preparing audited financial statements for group investments or representing an investor during an Internal Revenue Service (IRS) audit.
- The benefits of hiring a real estate CPA include minimizing potential tax liability, getting guidance for structuring a real estate business, and optimizing current and future investments.
- A good real estate CPA can help an investor remain tax-compliant during a 1031 exchange and provide advice on more sophisticated investment strategies, such as real estate investment trusts (REITs).
Is a real estate CPA the same thing as an accountant?
While both may provide similar services, such as identifying tax benefits and reporting business transactions, there are significant differences between a real estate CPA and an accountant.
A CPA is a higher professional designation that requires passing state education and licensing requirements and completing continuing education classes. As a rule of thumb, a real estate CPA may be more up to date on tax strategies and changes to the tax code relating to property than an accountant with a 4-year degree.
Real estate CPAs can perform specific duties that an accountant legally can’t, such as preparing audited financial statements for investors in a limited liability company (LLC) or representing real estate investors in meetings with the IRS.
6 key benefits of hiring a real estate CPA
Here are potential benefits of hiring a real estate CPA instead of an accountant:
1. Minimize tax liability
One of the biggest reasons to hire a CPA who specializes in real estate may be to minimize tax obligations. While many real estate investors already know how to file a tax return, a good real estate CPA can identify tax strategies to minimize or eliminate tax liability.
2. Optimize investments
A real estate CPA knows the subtle details of both state and federal tax laws and how to leverage the rules to an investor’s benefit. For example, a CPA can help an investor determine whether the cash or accrual method of accounting is more advantageous for a business and the pros and cons of using straight-line versus accelerated depreciation.
3. Structure a real estate business
Many investors purchase property as a sole proprietorship simply because that’s the easiest way. However, something that is easy to do isn’t necessarily the best thing to do.
A real estate CPA understands the potential tax benefits of holding rental property under a legal structure, like an LLC or S corporation, so an investor can make more prudent decisions about how to structure a real estate business.
4. Monitor changes to real estate tax code
The tax code in the U.S. has become increasingly complex over the years. Since the 1940s, the length of the tax code has skyrocketed from just a handful of pages to more than 70,000, according to the Tax Foundation.
Even a few minor modifications here and there could have a significant impact on tax liability. A good real estate CPA will stay on top of tax code changes to help an investor avoid paying more tax than necessary or breaking the law.
5. Advise on business decisions
A real estate CPA can spot changing trends and long-term real estate cycles that an investor focused on running a business may easily overlook.
For example, the Biden administration proposed increasing the tax on capital gains. Some investors panicked and sold before the end of the year to lock in gains at a lower tax rate and missed out on future property appreciation.
While the capital gains tax law currently remains unchanged, a good CPA can help an investor make solid purchase and sale decisions based on objective facts.
6. Help to scale up and grow a real estate business
A real estate investor with the goal of building wealth over the long term may benefit from having a real estate CPA as part of the team.
A CPA has a firm understanding of the various tax ramifications of buying, owning, and selling rental property as an investment portfolio grows. Receiving unbiased professional guidance from a real estate CPA when planning an investing strategy may help an investor to create wealth that can be passed from one generation to the next without tax liabilities.
Scenarios for using a real estate CPA
One of the many benefits of signing up for a free account with Stessa, a Roofstock company, is accessing a suite of tax resources created in partnership with The Real Estate CPA, a CPA firm that specializes in real estate investment.
A blog post on The Real Estate CPA website outlines 4 scenarios in which a real estate CPA comes in handy:
- Real estate taxes: A good real estate CPA can help an investor understand their responsibilities and rights under the law in order to avoid an unpleasant surprise when a property is sold.
- Tax compliance with an exchange: By using a real estate CPA during a tax-deferred exchange, an investor is better able to comply with strict IRS tax regulations.
- REITs: Some investors purchase real estate through a trust or other similar investment vehicle. A real estate CPA can provide advice on more sophisticated strategies, such as REITs or derivative investments, and the potential tax consequences of each.
- Expense categorization: While many operating expenses may be clear, categorizing other costs can be complex and confusing. By consulting with a real estate CPA, an investor may be able to identify additional opportunities to decrease taxable income by properly categorizing expenses.
How to choose a real estate CPA
When choosing a real estate CPA, an investor may wish to consider professional certifications and accreditations, specific areas of real estate that the CPA specializes in – such as residential rental property versus commercial real estate – and any other licenses a CPA may hold.
For example, some CPAs also hold a real estate license for the state that they practice in. Even though they may not be active investors, a CPA who has a real estate license may have a better understanding of the business.
Here are key questions to ask before hiring a real estate CPA, according to Texas REALTORS:
What types of clients does the CPA have?
A CPA with a large number of real estate clients may be able to provide more detailed guidance than one who works across a wide array of industries.
Does the CPA provide tax planning?
Some CPAs only prepare tax returns, while others offer tax preparation services along with tax planning strategies. By focusing on the big picture, a good real estate CPA may be able to help an investor reduce future tax liabilities.
Who in the CPA’s office will be working on the taxes?
Some real estate CPAs handle everything in-house, while others farm certain projects out. Although outsourcing routine jobs isn’t necessarily a bad thing, it’s a good idea for an investor to know who will be working on their taxes, along with how much experience that person has and the level of supervision they receive.
What is the availability of the CPA?
Some CPAs work almost 24/7 during tax season, then relax the rest of the year. Because real estate investing is a year-round business, having a CPA who is hard to reach after April 15 may not be the best choice. The needs and expectations of every investor are different, so be sure that a CPA’s accessibility and communication style are a good fit.
Is the CPA’s approach conservative or aggressive?
Different CPAs may have different appetites for risk that should match an investor’s. For example, an investor with a conservative approach probably wouldn’t want to hire an aggressive CPA who likes to push the envelope, especially if overzealous deductions result in a detailed tax audit.
What is the billing and fee structure?
Some real estate CPAs charge a flat rate, while others charge by the hour. If a CPA offers a flat fee, understand what’s included in the rate. An investor may be charged extra for calling and asking advice, or for receiving general information sent out to every client on the CPA’s mailing list.
Final thoughts
Having a CPA as part of a real estate team may benefit an investor in a number of ways, including minimizing tax liability and optimizing investments. A CPA who specializes in real estate may be better suited to help an investor stay on top of tax code changes, claim every possible deduction, and create a tax-advantaged real estate portfolio focused on long-term growth.
