In the real estate industry, you want an accountant you can trust. Here’s how to find them.
If you do not want to turn into a puddle of stress by the time you retire, you should probably hire a real estate CPA or an Enrolled Agent (EA). Whether you are a real estate investor, flipper, developer, broker, agent, or any other sort of real estate professional, tax time can be extremely painstaking for those who are not well-versed in the realm of accounting; don’t let it be a taxing (pun intended) task for you anymore.
Adding an accountant to your arsenal is invaluable. However, just as it can be difficult to manage your own books, it is also difficult to find the right CPA for your business. It is especially important to find an accountant who understands the ins and outs of your industry and your situation, which is why you should look for an accountant with a background or niche in real estate. Many times it is just wise to outsource your accounting department.
CPAs are supposed to help you keep your finances organized, ensure that you are meeting all compliance guidelines, direct your business toward growth, and make sure that you feel confident in the numbers—so it is important that you ask them all about themselves and their services.
Before you hire anybody, you should interview them, and it is no different for real estate CPAs. We have compiled a list of questions—some general, some industry-specific, and some with answers—that you should be asking a prospective real estate tax preparer. Don’t be shy; it is your right to know what you are paying for!
Also, here’s a little tip: when scouting for a CPA or EA, just tell them you are in real estate rather than the specifics of your company. This gives you an opportunity to throw some curveball questions and see how much they really know about the industry!
Professional (And a little bit personal)
It is important that you get to know a tax preparer on both a professional and a personal level; they are going to be a part of your company’s team and help you grow, and to work comfortably and effectively with somebody else, you need to understand them!
- How did they get started in doing what they do best?
- When did they delve into real estate?
- If not all of it, what percentage of your practice today is in real estate?
- What is their previous experience?
- What education has the tax preparer received?
- Why did they want to be a CPA or EA? (This question helps you understand if they are truly invested in your business; you do not want someone who does not care. Also, make sure to ask if their CPA license is still active!)
- When are they available? (Make sure you are working with somebody who is available when you need him or her. Ask them if they can work year-round or if they are only free during tax season.)
- Will they be able to represent you at an IRS audit?
- Can they provide an example of how they helped save a real estate client before?
- What other services do they offer?
- Any recommendations for accounting software?
- Would you help in creating new entities? (Structure such as LLC, S-Corp, C-Corp)
- Are you familiar with other state filings? (You should ask this because, given that today there are no bounds of traveling or virtual investments, it might be pertinent in the future even if it is not right now.)
- Do you own any investment properties yourself? If so, what kind are they (e.g., rental properties, vacation homes, farmland, properties you’ve sold on land contract, etc.)? (This is definitely a more personal question, and anybody who owns a house is going to say yes–but it still gives you the chance to see if they partake in real estate investing themselves outside of their own home!)
Starting a business with nothing more than experience and the title of a real estate investor is not the way to go. You need someone who is taking continuous real estate education classes, especially given the ever-changing tax laws. The course varies between industry segments, as financials play a huge role in commercial versus residential versus HOA versus vacation rentals versus… You get the idea. You need somebody with experience you can trust.
The ABC’s of Your Financials
You are looking for somebody to outsource your accounting and bookkeeping and offer controller services. Clearly, looking for the lowest price tag is not the right solution.
- Would you have someone in your office be handling my books? If so, what is THEIR level of expertise in real estate accounting? (You do not want somebody who does data entry. You want someone who can ask questions, nitpick each and every transaction to save you money, and understand the business by reading your statements. Remember: the devil is in the details.)
- What kinds of ongoing tasks will you need from me in order to do your job? What will I be expected to do?
- Where would I record my home office expenses? (First things first: if somebody says that you should track your home office expenses in the same accounting file as your business expenses, do not! You should track them separately, and here’s why: if you do not record these separately, you can inaccurately represent your finances, both personally and professionally, and you will not be able to know the true equity of your business. Many real estate professionals do not need to lease an office since most of their work with clients is either virtual or on-site, so home office deductions can be a big benefit if you are a one-man or one-woman show or if your team is virtually connected. Please note that you probably shouldn’t share your personal expenses with your accountant or the IRS if they come knocking.)
- Should I track my cash flow on a cash or accrual basis? (Many people fail to understand the difference between the two. You can track your financials on either a cash or an accrual basis. If you track on an accrual basis, you can know your true equity at any time; on the other hand, if you use a cash basis, you can only recognize the cash you have on hand. You should always know your equity, assets, and liabilities—and that goes for all businesses, not just real estate. If you want to take a shortcut, our advice is to use a hybrid of the two accounting methods to analyze your true financial situation.)
- Should I deduct my inventory for the end of the year? (Most real estate investors who flip, rehab, develop or rent do not use the word inventory for properties, but I have heard many beginners do. If you do this, you should probably stop, as it can lead to some confusion. Many investors have diversified their income streams, and one of these diversifications is often in retail, where they carry inventory. For a retail inventory, you may be allowed to deduct inventory the year it was purchased rather than the year they were sold. This can dramatically reduce the amount of taxes you have to pay each year.)
- If I take the bonus depreciation, how will that affect my taxes? If that causes a loss for my real estate activity, how can I offset my other income?
- Suppose I am in a 25% tax bracket. Where is my income tax advantage – on interest received, profit on a property, a paycheck, or other business income on Schedule C?
- What advice do you have for me for my IRA investments? (Investors use their IRA savings in real estate. If the CPA does not have any advice, they should suggest you contact someone who is knowledgeable rather than trying to do their own research. Everybody knows the game “Telephone,” in which some information gets more jumbled the longer it is passed on. That is what happens when people who are not experts try to acquire expertise overnight.)
- How can I save more to get a tax deduction if I have a business on the side besides real estate investing? (If you file Schedule C, you may be able to invest 25% of your profit and reduce taxes. It all depends on your personal and business income, expenses, and current tax laws.)
Specifics for the Real Estate Industry
Asking questions throughout your conversation may only get you basic answers, which is totally fine; you’re not trying to see into your tax preparer’s soul (yet). However, there are more specific questions you can ask to gather an idea of his or her level of experience.
- Should we buy a property under a corporation? (Before they even give you an answer, they should ask twenty questions. Okay, maybe not twenty, but they should be asking something before giving you a response. Nowadays, investment properties are more into LLC and Trust, and others hold them in their own personal name or corporation. Every situation is different, so they should evaluate your personal income stream, investments, and last 3 tax returns, and then they can give you a definite answer.)
- Should I buy all properties under my name? (Why not use mine? Just kidding. If they ask the questions above and then some, you should be covered.)
- All of my properties are under my personal name. What would you suggest I do? (There are several different answers to this question, some of which are a Series LLC or a Trust, either revocable or irrevocable. Whatever answer they give, ask them why they would suggest it. Do your due diligence.)
- When do you think it would be a good idea to transfer all the properties from my name to…? And what are the tax advantages of doing so?
- When I draw on construction, should it be recorded as an income? (The answer to this question is an absolute no. Was that the answer they gave you, just walk away.)
- Where should I record the construction loan that I still have to draw on? (My answer is on the Balance Sheet.)
- I purchased a building for rent and plan on fixing it up; should I show it as an expense? (Well, if there are tenants and you are fixing instead of improving the property to increase the value, then it could be recorded as an expense (on Profit & Loss). On the other hand, improvements would be an Asset on the Balance Sheet.)
- Can I deduct expenses on my rental even when the unit is vacant? (Only when the property is ready to rent. Anything before that is going to be capitalized, and you may be eligible for accelerated depreciation)
- What do I do with expenses that do not pertain to a specific property? (Deduct it as an expense on your tax return; just do not link it to a property that you are holding, renting, or flipping.)
- How do I handle expenses for properties that we did not close that are bought? (Do not add it to one of the existing or new properties that you will buy; if you do, equity for that specific property will be inaccurate)
- Can I deduct mortgage payments on a rental property? (No, you do not take the entire payment; instead, you have to break it down between escrow, interest, principal, and any other expense. That is the only way to get a truly accurate picture of your cash flow, and that relates to a hybrid accounting method.)
- When I sell my rental property, what should I deduct to determine the net profit? (Here is an example: I purchased the property for $90,000 and sold it at $200,000; what would be my profit? A few of the things they should ask about are the loan cost, settlement cost, payoff balance to your mortgage company, improvements, and depreciation. If they don’t ask about these, they are clearly not well-versed in real estate accounting.)
- How do I figure out the basis of the personal property that I am going to rent? (You will probably find several different answers to this question. Personally, I would say to base it on the original purchase price and any improvements you made to the property, such as a new kitchen, deck, HVAC, etc.)
- Would you file 1099 forms for us? How do we determine when to file them.? (You do not file 1099 forms for a vendor when they are a C-Corporation, and the payment is less than $600. There are many more rules, too, so it is best to consult the CPA or the IRS website.)
- How do I figure out my tax if I sell my rental property? (If you asked the above questions, then this is just a frivolous one to ask.)
- What is your take on determining land value? (It all varies; anywhere from 10% to 20% is considered land, only if there is a structure or building.)
- What is the 1031 exchange?
- My parents are giving me money. How do I address it? (Is it a gift? A loan—with or without interest? Was there a written agreement? Asking a question like this shows if they are familiar with gift tax laws or interest deductions. They may suggest that you involve an attorney.)
Do they know your niche?
All is well and great when you find a real estate CPA—until you realize they know nothing about your specific area. We drummed up a few specific questions you can ask to see if they have enough expertise to suit your accounting needs.
For commercial properties:
- Do you have an understanding of the ever-changing property accounting landscape?
- Can you decipher a lease and help me understand how it will affect my financials?
- How many years of depreciation can I take on tenant improvements?
- Can you help with CAM reconciliation?
For vacation rentals:
- When is money received considered income?
For Homeowners’ Associations:
- What would you do with the money collected in advance for future expenses?
- What reports do you recommend presenting to members?
- Would you be available to attend a board meeting?
For real estate brokers:
- Where do I show my money received as being held?
- Do I issue a Form 1099 when the title company issues a commission check directly to the agent?
For real estate agents:
- Can I deduct mileage?
- Can I deduct the gifts I give to my clients?
So, as you can see, there are going to be more specific questions for each sector of the real estate industry, and the list goes on (hotels, warehouses, land for investment or development, shopping malls, etc.). It takes time, energy, and resources to stay up-to-date with the newest laws and allowances, but you want somebody who will give it his or her all! We dedicate ourselves to staying at the forefront of industry developments and are constantly on our A-game with QuickBooks advisory and outsourced accounting.
On the Go
Unless you complete all of your services virtually, you will need to travel for work. Here are a few questions you can run by your prospective tax preparer regarding traveling:
- Should I buy a car, and if so, should it be under my personal or business name?
- Would leasing be an option?
- Should I just use my personal car for business?
- Do you recommend any apps to track mileage?
You can get all of the advice you want from a consultant or CPA, but in the end, the money and the choice are yours.
- Can you set up our books and review our accounts? (You should be looking for somebody who asks you questions before setting up your chart of accounts. Obtaining a long list of accounts from a related association is not the right move, especially when 75% of those accounts do not apply to you. Fast Trac Consulting has industry-specific charts of accounts that make sense—and almost 100% of the accounts will apply to your business!)
- How should I track my income and expenses? On a cash or accrual basis? Why? (To determine this, you must figure out what is important to you. Do you want to know what you owe, what others owe you, and what you own? If so, you should use an accrual basis. For example, if you have a mortgage, tracking the balance of that would be on an accrual basis; you know the amount of escrow they hold (asset), the principal balance (liability), and interest (expense). That is why we recommend accrual! You can also use software that tracks on a cash and accrual basis simultaneously. Find what fits your business model.)
- Which software do you recommend for real estate accounting and bookkeeping? (You must remember that not all the software recommended by CPAs is the right solution for you. They are not involved in your operational and management processes—they are there to look at your year-end numbers and advise you accordingly. You are the one giving the details, so remember that the software should benefit you more than them.)
- Should I use Online or Desktop? (This question and its corresponding answer should not be about saving money. It is about analyzing your business and each property and accordingly making the smart decision. You can contact us with the details of your operations and acquisition processes, and we can guide you through the software selection process.)
A few of these can be asked later…
Here is a list of questions that clients have asked when speaking to us and when surfing the web. We did our fair share of primary research—speaking to clients, Googling common questions, sifting through real estate forums, and searching through social media—to put together this seemingly endless list because we wanted to cover all our bases. Everybody has heard the saying, “Curiosity killed the cat,” but not many people know of the latter half. The full quote goes, “Curiosity killed the cat, but satisfaction brought it back.” Don’t be afraid to ask as many questions as you need until you’re satisfied.
If there are any other questions you want to suggest, please let us know, and we will add them to our list!
- How do you report K-1 real estate rental income from an LLC?
- Has there been any change to the passive activity loss rules?
- Can I claim a primary residence exclusion for an apartment if I rent others connected to it?
- Will the Debt Forgiveness Act of 2007 apply to me?
- What are the state tax implications of selling my vacation home?
- Can a loss on one house offset the gain on another?
- What are the tax planning strategies for selling an investment property?
- Must I report capital gains on a real estate sale in a foreign country?
- What happens if only one member of a partnership lives in a house purchased jointly?
- What are the capital gains exemptions for house sales?
- Do I have to pay capital gains in two states?
- Can I use tax advantages even if I haven’t yet rented my property?
- Should there be withholding when I sell a rental home?
- Could waiting to sell real estate for tax reasons cost you money?
- If I don’t claim depreciation, is the tax basis of the property still reduced?
- Can you review my prior tax returns? Will that delay my filing?
- Is residential accumulated depreciation taxed as ordinary income?
- Can taxes on installment sale income be mitigated?
- Will we be taxed on the sale of our rental home?
- How can I avoid being taxed on the sale of my home?
- What are the tax advantages of selling income rental property to a family member?
- Am I being double-taxed for the sale of my vacation home?
- What are the tax implications of renting our home?
- Are points tax-deductible for commercial real estate?
- What capital gains laws are there on rental properties?
- Can I transfer a real estate deal to a tax-deferred annuity?
- Can I execute a “Quit Claim Deed” to transfer my rental to pass on my tax liability?
- Will my tax-deferred exchange still be valid if I move in?
- If two people own a property, can one sell and one exchange?
- Can I still apply the principle residence exclusion if I rent my home?
- What are the procedures for stepped-up value on real estate?
- Can I do a tax-deferred real estate exchange?
- How do installment sales work?
Before You Go
Do not end the interview until you learn about the way they work. You could find somebody who is an expert in the field, but their work style clashes terribly with yours—and that is something you do not want.
- What does your client process look like? (For our services, everything is electronic, from an online secured portal and project management software to interact with you, your team, and my team at Fast Trac Consulting.)
- Do you ask for my permission before you submit any documents to the IRS and State? (It is important to always ask for permission and a signature to file any legal documents, especially if those documents can have significant consequences. We personally always ask for permission and get to see our clients’ eyes shine when we file their returns.)
- If I have to file an extension, would you help me? Would there be any fee associated with it? Should I request/file for an extension?
- When will you have the tax return ready for me to review? (Ask for a specific date when you hand over all the documents required to file tax returns.)
- Can you help me find other team members to help my business (attorneys, insurance agents, real estate agents, etc.)? (Most CPAs will definitely help you with this, and they probably already have contacts in mind when you ask this. If you mesh well with the CPA, you and their contacts are probably going to mesh well also.)
- How do you typically communicate with clients? Email? Phone? Face-to-face? (For us, all of our clients are virtual. As an accountant, I got QuickBooks Certified in 1999, started my business in 2001, and have been going strong since then. As I was part-time and worked around my child and my health, I had no choice but to go virtual. Even today, we use screen sharing and video chat to communicate with our clients!)
- I’m glad we had this conversation, and I’ve gotten to know you and your mindset. What is our next step? (At this point, they should share their pricing structure, but that is not the focus. The goal here is to find somebody who knows their stuff and will be there for you every step of the way. They may ask for documents, a deposit, an agreement, and a list of questions for you to answer.)
- List of questions: If they give you a form similar to your tax return, Schedule C, or Schedule E, just enter your info. Just kidding! They should be taking the numbers you give them and filling them in to give you the return to review before filing.
- Documents: Make sure to expand on this. Do they require the documents to be delivered by hand or electronically? Do they use a secured portal?
- Deposit: Every CPA is different, so ask if the payment is electronic or not.
- How do they price their services? (You should definitely save this question for last. If their answers to all of the other questions are not satisfactory, I doubt you want to be asking them about pricing—so keep this until after they’ve passed your test.)
Let’s recap your goals for the interview. You want to find somebody who:
- Analyzes and review your reports
- Takes time to understand your business operations
- Can educate you in the process of filing tax returns
- Prepares a tax return with less tax payments
- Prepares a tax return and complies with all IRS guidelines
- Prepares a tax return accurately and punctually
- Can be a part of your team and further your business growth
- Can assist you with IRS issues
- Is an authorized IRS e-file provider
If you ask for these things and receive a curt response or even a “no,” the CPA probably does not have the knowledge, the passion, or the time to invest in your business. You should probably move on. It is okay if you find only one person who has the expertise fit for your field; he or she could be the beginning of a powerful team member, and we are here to help to be a part of your outsourced accounting team that runs your numbers behind the scenes.
It is your responsibility to check the return against the documents you shared with your preparer. Always ask them questions and check everything off the list. As Santa does, make your list and check it twice. When it is time to file your income tax return, err on the side of caution. You have to pay taxes, and it can be annoying to calculate the numbers, so we are always here to lend a hand and review your return.
We know the real estate industry is very complex and intricate. That is why we want you to focus on what you do best: find those deals, get funding, fix the property, and sell for profit—and start all over again. Accounting is just the beginning, and we can help with your cash flow management, bank reconciliation, cost segregation, and more to get you tax-ready! For more information regarding our outstanding real estate accounting team, contact us or visit FastTracConsulting.com.
Disclaimer: We just want to open your eyes. You may not need all of these questions, or you may need even more. Remember: we are not your tax advisor, tax strategist, tax preparer, or attorney. The above material was written for general, informational purposes and should not be relied on for tax, legal, or accounting advice. If you need any advice, contact us directly. This information and your use do not constitute or create an accountant-client relationship.