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Should You Use A Real Estate CPA?

Benjamin Locke

Author

SUMMARY

A real estate CPA specializes in managing the financial and tax complexities of real estate investments, offering valuable expertise in tax planning, deductions, and cost segregation to maximize returns. They assist with strategies like capital gains tax minimization, ensuring compliance with tax regulations, and improving cash flow management. By leveraging their knowledge, real estate investors can save on taxes, avoid penalties, and make informed financial decisions, making a CPA a worthwhile investment for those with multiple or complex property holdings.

When dealing with real estate investments, finances can quickly become complicated, and people often have way too much on their plate to deal with all the numbers, excel sheets, and tax code stipulations. From understanding tax laws to managing rental income and expenses, a certified public accountant (CPA) specializing in real estate can be a valuable asset. A real estate CPA not only provides expertise in tax planning and compliance but also offers sound financial advice to help maximize your investment returns and save on taxes, particularly if you are managing multiple short-term rentals like multiple Airbnbs.  Most importantly, real estate CPAs can help take advantage of every tax deduction that’s available that most regular people will not even know about.

What is a real estate CPA?

A real estate CPA is a certified public accountant with specialized knowledge and experience in the real estate industry. These professionals are trained in managing the financial and tax aspects of real estate transactions, investments, property management, and development. Unlike general CPAs, a real estate CPA understands the unique accounting practices, and financial strategies specific to real estate. This specialization allows them to provide tailored advice that can help you optimize your real estate investments and ensure that all your Is are dotted and Ts crossed when dealing with regulations. 

Ways a CPA can save you money in real estate

A real estate CPA can help maximize deductions

A real estate CPA knows all the tax breaks available, like deductions for property depreciation(and how to fully leverage cost segregation studies, the short-term rental tax loophole, mortgage interest, and property management expenses. They ensure you claim everything you’re entitled to, lowering your taxable income.

Example: You own a few rental properties but didn’t know you could claim depreciation as a deduction. Your CPA reviews your tax returns and finds you’ve missed this deduction for several years.

Year Income Depreciation Adjusted Income Refund
2021 $50,000 $10,000 $40,000 $2,500
2022 $55,000 $10,000 $45,000 $2,750
Total Refund $5,250

A real estate CPA can help you accelerate depreciation with cost segregation

Cost segregation is probably the most essential and advantageous tax loophole that few really know about. Cost segregation helps accelerate depreciation on specific parts of a property, leading to substantial tax savings in the early years of ownership. It’s important to note here that a real estate CPA is not needed in order to APPLY your cost segregation studies on your tax returns. Real estate CPAs do not perform cost segregation studies, which is why you need to work with a professional company. This strategy reduces your taxable income, allowing you to reinvest savings back into your business or claim substantial losses that you can carry over on your W2 tax returns into the following year.

Example: Let’s say you purchased a $1 million house you use for a long-term rental.  Typically, you would depreciate the building over 27.5 years, resulting in an annual depreciation deduction of about $36,364. However, with cost segregation, your CPA identifies $200,000 worth of assets, such as appliances, carpets, and fixtures, that can be depreciated over 5, 7, or 15 years instead. This allows you to deduct a significant portion of that $200,000 in the first few years, potentially reducing your tax liability by tens of thousands of dollars upfront.

Asset Type Value Depreciation Schedule Annual Deduction Years 1-5 Deduction
Building Structure $800,000 27.5 years $29,091 $145,455
Short-Life Assets (e.g., Appliances, Carpeting) $100,000 5 years $20,000 $100,000
Land Improvements (e.g., Landscaping) $100,000 15 years $6,667 $33,335
Total $1,000,000 $278,790

A real estate CPA can help strategize your capital gains taxes

A CPA helps you plan your taxes to minimize what you owe. This could involve timing property sales to benefit from lower tax rates or using strategies like a 1031 exchange to defer paying taxes on profits (potentially in perpetuity)  when you sell a property and buy another.

Example: You’re planning to sell a property for a large profit, but you’re concerned about the taxes you’ll owe. Your CPA suggests using a 1031 exchange, which allows you to reinvest the sale proceeds into a new property without immediately paying capital gains taxes. This saves you substantial taxes and will enable you to reinvest more into your next property.

Sale Price Original Cost Capital Gain Tax Rate Tax Owed 1031 Exchange Tax Tax Deferred
$500,000 $300,000 $200,000 20% $40,000 $0 $40,000

A real estate CPA can help avoid penalties and fines

A CPA ensures your tax filings are accurate and submitted on time, helping you avoid costly mistakes that could lead to fines or penalties from the IRS.

Example: You manage multiple properties and didn’t realize each requires specific tax filings. You were at risk of incurring several penalties for late filings, but your CPA catches the oversight in time, files the necessary forms, and saves you from paying hefty fines out of pocket.

Number of Properties Potential Penalty per Property Total Potential Penalties Penalties Avoided
3 $5,000 $15,000 $15,000

A CPA can improve your cash flow management

A CPA helps you monitor your cash flow, ensuring you have enough income to cover your expenses. They provide financial analysis and forecasting to prevent cash shortages or missed payments.

Example: You notice your rental income isn’t covering your mortgage payments and property expenses, causing a cash flow crunch. Your CPA reviews your finances, identifies unnecessary expenses to cut, and suggests adjusting the rent on some properties. This improves your cash flow, which results in you having enough to cover all costs and avoid financial strain.

Monthly Rental Income Monthly Expenses Original Cash Flow Adjusted Rent Increase New Cash Flow
$10,000 $12,000 -$2,000 +$3,000 $1,000

How much does a real estate CPA cost?

The cost of hiring a real estate CPA varies depending on different variables such as the complexity of your financial situation, the services required, and the CPA’s level of experience. On average, real estate CPAs charge between $150 to $400 per hour. In our experience, we have seen real estate CPAs charge anywhere from $500 to $2,000 per tax return. In these cases, you get what you pay for, so don’t be shy to invest in a good CPA!

One thing that people need to consider is the value that a real estate CPA can provide and result in a lot of bang for the buck if used properly. The savings they generate through tax optimization, compliance, and strategic planning often outweigh their fees, making them a worthwhile investment for serious real estate investors.

How do I find a real estate CPA near me?

Finding a CPA specializing in real estate requires careful consideration and research. Here are some steps to help you find a qualified professional:

What types of things should you consider not hiring a real estate CPA for?

Basic bookkeeping

If you have a small portfolio or only a few transactions, basic bookkeeping may be manageable without a CPA. In these cases, using simple accounting software like Quickbooks or hiring a friend with an accounting degree who is good with numbers might be a better solution.

Routine property management

Real estate CPAs are not property managers; their personalities couldn’t be more different.  Tasks such as tenant management, maintenance, and day-to-day property operations do not require their expertise/accounting skills and are better handled by dedicated property managers.

Non-complex tax situations

A general CPA or tax preparer might be more cost-effective if your tax situation is straightforward, without multiple properties or complex investments That being said, you might be missing out on deductions, write-offs, and other ways to take advantage of loopholes in the tax code that others are not.

Non-real estate-related advice

For general financial advice or investment strategy that is not specifically related to real estate, a financial advisor or general CPA might be more appropriate. This approach ensures you receive what you are looking for in terms of guidance related to broader financial goals, beyond just real estate.

The real estate tax code is vast and complex, offering significant opportunities for wealth preservation and creation if leveraged correctly. A skilled real estate CPA can guide you through these complexities. They can help you maximize deductions like depreciation and ensure you’re taking advantage of all applicable tax benefits. Marshal Davis, real estate investor. 

 

Bottom Line: A real estate CPA is worth it for high income real estate investors

A real estate CPA is worth it for some, especially those with multiple properties, complex tax situations, or plans to expand their real estate portfolio. They bring expertise in navigating the complex tax laws and financial strategies unique to real estate. This can lead to significant cost savings through deductions like cost segregation and strategic tax planning.

By hammering home compliance with tax regulations and optimizing financial performance, a real estate CPA can help investors maximize their returns and avoid costly mistakes. This means that whether or not you hire a CPA is your call, but if you have more than one property or use all or portions of your real estate holdings as a business, it’s probably a good call.

FAQ

What are the benefits of hiring a real estate CPA if I only own a single rental property?

Even with one rental property, a real estate CPA can help you maximize your tax savings and provide advice on managing your property efficiently. They can also assist in planning for future investments and help you avoid common mistakes.

How does a real estate CPA handle property investments in different states?

They are not needed but they can be helpful. If you have properties in different states, a real estate CPA who specializes in that state should know how to navigate each state’s tax rules and regulations. They ensure compliance with all state laws and find ways to reduce your overall tax burden by using specific state credits or deductions.

Can a real estate CPA help with passing properties to my kids or heirs?

Yes, a real estate CPA can make transferring properties to your kids or heirs easier and more tax-efficient. They offer strategies to minimize taxes and avoid the probate process, making it simpler and less costly for your heirs to inherit property.

What happens during my first meeting with a real estate CPA?

During your first meeting, the CPA will ask about your properties, financial goals, and any challenges you’re facing. They will review your financial documents to identify areas where they can help you save money or improve your finances. This meeting is also a good time to ask questions and determine if they are the right fit for your needs.

 

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