Posts Tagged ‘successful real estate investors’

Finding a Good Accountant for Your Income Properties

Vetting a tax pro before you hire her is the most important task you have. The right choice will save you thousands while reducing stress and problems. Here are the steps and questions you need to ask when vetting an accountant. #questions #taxpro #CPA #EA #enrolledagent #IRS The Tax Code has gown in complexity the last few years. Finding a qualified tax professional who understands the nuances of taxes is harder than ever. Without proper vetting you can overpay for service and end up with subpar results.

The growing complexity of the Tax Code has more tax professionals specializing. This is a good news/bad news situation. The good news is that when you find the best tax professional for your situation you should achieve maximum results. The bad news is that prep fees reflect the higher competence level.

And if you are going to pay more you want to make sure you are getting the best value. 

All tax professionals are required to work outside their area of specialty. An accountant focusing on investment properties still has to complete the remainder of the tax return. You need a tax professional who understands how decisions made with investments affects the remainder of the return.

The meat of the value when hiring a tax pro is finding one specializing in the most difficult or complex area of your return or the portion causing the most tax. 

For example, income properties are a part of many tax returns. Those looking to retire early may use rentals to supplement their income. Income properties can also supplement part-time income. The tax professional you need should understand the basics of an individual tax return. The accountant should also understand the fundamentals of the various retirement accounts and the implications of using each for your situation. But most important of all, you need a tax pro focused on the rules surrounding income property.

Desperation is a bad guide. Just because an accountant accepts you as a client doesn’t mean it’s a good fit. You need to vet your choice before signing the engagement letter and committing to her services.

Today we will focus on how you can vet a tax professional (enrolled agent, CPA, attorney or other tax professionals) to handle your investment properties. Asking the right questions is vital. Knowing what answer you should get is even more important. 

 

Vetting a Tax Professional

Each situation requires a different set of questions. We will focus on a individual with income properties. Small business owners will have different questions. You will need to do some research to prepare a list of questions specific to your needs before visiting the accountant.

The answers the accountant gives is less important than how they handle the questions. First, you probably don’t know all the details of taxes surrounding your situation. Therefore, you may not know the accuracy of the answers given. 

You don’t want a know-it-all tax professional. It is okay for her to say she doesn’t know the answer and will need to look it up. This is normal! If the candidate never needs to research they are either a prodigy or an idiot and I’m not betting on prodigy.

You also want the accountant to add something to the mix. Your questions and situation should jar some additional ideas from the tax professional you didn’t think of. That is why you are hiring her!

The accountant should care and be interested. Smart isn’t good enough. This is a long-term (we should hope) relationship. As the accountant knows you better she can provide better and better service. Her value should grow each year.

I’m putting a lot of weight on the accountant. I fully expect the tax professional to charge accordingly. No one should work for less than the value they provide. You should be willing to pay more if you expect more.

Expect more. It’s a better deal.

Let’s run down the vetting process and questions you should ask a tax professional if you own or plan on owning income property.

 

Should I have an LLC?

LLCs are organized on the state level. I can’t think of a state where have income properties in an LLC would cause an issue. The accountant’s answer is important here. You may need an attorney to set up the LLC if their are issues.

Under no circumstances should you hold real estate in a regular or S corporation or LLC electing as such! There is no added benefit to doing so and many, many problems associated with it. 

The accountant should point out that the income properties held by the LLC will have no tax effect as you will be treated as a “disregarded entity” for tax purposes. This means if you own the property/s solely you will report on Schedule E of your personal tax return and if there are two or more owners the LLC defaults to a partnership. For income properties, the LLC value is for legal purposes only.

If the accountant wants to deviate from my answers they had better have a really good reason. There are not many and I have never seen a qualified tax professional or attorney recommend putting real estate inside an S corporation. 

This is a warning to all the DIYers setting up their LLC. Too many think they save money by putting the properties in an S corporation and it really only causes problems.

 

Recordkeeping

Next you should ask how the accountant want your records. This is a personal preference. As long as your are comfortable presenting your data in the format asked for the relationship should run smooth.

This is also the time to discuss bookkeeping services if you need help in this area. If you know you’ll struggle with the recommended bookkeeping process requested by the accountant consider spending a few extra dollars for a quality bookkeeper. As hard as it is to believe, good books save you money, reduce audit risk and lower your taxes.

 

Deductions and Other Tax Advantages.

Now we turn to a variety of unique tax deductions and benefits owners of income property enjoy. The normal deductions should be obvious: property taxes, mortgage interest, depreciation, supplies, repairs, advertising . . . 

I want you to ask difficult questions on unique issues when vetting a tax pro candidate. The accountant should understand these issues or be willing to research them. 

This list is not exhaustive. The issues I want you to ask about I see constantly so you want an accountant versed in these issues. It is where the tax savings reside.

 

Travel

Ask about mileage. The accountant should explain what is allowed. She should also explain if the standard mileage rate or actual expense is better.

 

Other non-cash deductions

I consider the mileage deduction a non-cash deduction. There are a few others worth noting. 

Before taxes become a problem you need to ask your accountant these questions. #accountant #CPA #EA #enrolledagent #taxpro #tax First, you can use a per diem when you travel. If you attend a real estate investing seminar you can deduct the hotel, airfare (or miles if driving), the cost of the seminar and a meal and incidental expense allowance (M&IE). 

Hotels and other travel expenses require a receipt for substantiation (in case you get audited). However, meals are a different story.

You can deduct actual meal expenses if you want or you can use the M&IE per diem rate. You can use a chart to deduct based on the city you are visiting or the hi-low rate. You must use the same method within each business trip. However, you can switch between different business trips, using actual expense on one and the per diem on another within the same tax year.

Second, if you use actual expense when traveling you do NOT need to keep a receipt for meals under $75, including tip. Your accounting records of the meal expense along with the business purpose of the meal and who you were with is sufficient for a tax deduction.

You can not use the per diem for non-travel business meals. However, the $75 receipt rule still applies.

 

Tangible property rules

Some things are deducted and some need to be capitalized (depreciated over a period of time). Not long ago this was a real pain for income property owners because asset expensing (Section 179) is not allowed on income real estate and its components (appliances, for example). 

Under the new tangible property rules all items $2,500 or less can be deducted regardless. That means most appliances are now deducted versus depreciating over 5 years. Curtains, carpet and other minor items are also currently deducted. 

An election is required so ask to assure the accountant you are vetting understands this.

 

Repair regs

Improvements have always been a serious issue. Improvements are depreciated over 27.5 years for residential property and 39 years for commercial. You still pay the expense up front.

Improvements are defined as increasing the value of the property. Many improvements therefore are really deductible repairs under regulations. 

Find the best tax accountant possible by asking the right questions. As long as you are paying the bill your deserve the absolute top level of service. #CPA #EA #enrolledagent #taxpro #investments #realestate #incomepropertiesFor example, flooring is usually not an improvement since it only restores the property to its original value. Roof replacement can also be considered a repair, even if it is really expensive. Cost does not automatically cause a deductible repair to become a capitalized improvement! 

Generally (and this is why a detailed conversation with your tax pro candidate is so important), if flooring is replaced with the same type it is a repair as long as floor boards are not replaced or reworked. The same applies to roofing. If the same roofing material is used to replace an old roof it probably qualifies as a deductible repair as long as roof board are not replaced. 

However, the previous paragraph (flooring/roofing/other repairs) only qualifies for a deduction if you own the property as an income property for 5 or more years. It is assumed by the IRS that if you owned the property for a shorter time period the property didn’t have enough time to deteriorate so the repairs are actually improvements. Planning with your accountant is vital.

However!

There is still one more really big out. If you have an improvement of $10,000 or less you can elect to deduct the improvement as a repair expense. 

There is some gray area here. The $10,000 repair reg rule is per building, kind of. If you remodel a kitchen and bathroom in the same apartment it must be $10,000 or less combined to use the repair reg election.

The same probably applies in multi-unit buildings. Tax professionals differ here. Many tax professionals consider all improvements in a duplex. This means all improvements in both apartments must be $10,000 or less to qualify under the repair regs. 

But in larger multi-unit buildings it gets more complicated. Do you count all bathroom remodels , et cetera in a 20 unit complex? This accountant looks at each situation before making a judgement call. (I also research this a lot based on facts and circumstances when it comes up.) 

You need a serious discussion on this issue when vetting an accountant because it is only a matter of time before it comes up in real life.

 

Cost segregation studies

Sometimes you can super-charge your depreciation with income properties. Cost segregation studies can generate ~ $400,000 in extra deductions the first year on a $1 million property, depending on the facts and circumstances. Costs segregation studies work on properties as low as $300,000.

You can read more about this powerful tax strategy here. 

 

Grouping

Sometimes it is advantageous to group certain properties/activities together to maximize tax benefits. Grouping is less common so many tax professionals need to review the facts and circumstances before committing to an answer.

 

Qualified Business Income Deduction (199A)

This new deduction created by the Tax Cuts and Jobs Act of late 2017 is complicated. To make matters worse the IRS has issued several batches of regulations as it relates to income property and several issues remain unresolved. 

You can read more about the QBID and how it relates to income properties here. 

Be sure to discuss any recent changes with your tax professional. Again, they can pass the vetting process with less than perfect answers because perfect answers don’t exist. But they need to understand what has been clarified and have good reasons to take the position they do in unclarified areas.

 

There are other questions you will want to ask.

Finding a qualified tax professional takes time and work. It is all worth it in the end. The best tax professionals are selective in who they take on as clients so you will be vetted at the same time you are vetting. This is a good thing as you want a good fit for all parties involved because it is your investment and money is on the line.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

The Best Rental Property You Can Buy

Fool-proof real estate investing. Investing in real estate is easy and profitable if you know a few secrets to success. Buying right is the first step. Real profits are found by renting to the right tenant and keeping them.It’s official. I’m back in the real estate business!

Before you get too excited, let me explain. Waaaay back in the day I was a third owner of a real estate partnership with my dad and brother. We bought investment properties of all kinds. We specialized in single-family homes, but owned plenty of multi-unit buildings, storage and rooming houses. 

My partners were more along the lines of the silent kind. I, of course, could bounce ideas off them, but the workload fell on me. I hired maintenance staff and crews and was always interviewing potential property managers. Before we closed shop we had taken an interest in 179 buildings (not all at once). At the peak we had somewhere north of 80 units scattered all over NE Wisconsin.

We sold properties frequently once our inventory grew. We held some properties longer — our first property was one of the last to be sold.

After we were in the business a few years we gained a reputation for renovating run-down properties. I used these as a way to generate cash for long-term real estate investments.

Eventually a few local cities had us on speed-dial when they condemned properties. We picked up these rat-traps for pocket change ($5,000 or less). Spent $40,000 or so renovating and sold for $70,000 or so; rinse and repeat.

Buying and selling (and managing) so many properties eventually caused me to burn-out. It was a good (if not sometimes a dirty) business. I washed my hands of investment properties and sold en masse.

For years we were buying and selling multiple properties per month. Now I was just selling. 

 

Investing with a Purpose

The last rental property in the partnership was sold in the year 2000. I never thought it was more than a passing phase of my life. I did the real estate thing and was content. 

Except I wasn’t really out of real estate.

When $40 million of real estate transactions cross your desk in 12 years you learn a few things:

  1. Real estate agents are full of schmoo. They are in the business of selling real estate and will say whatever necessary to earn a commission. (I have changed my opinion on this and think agents are vital in the buying, selling and managing of RE.)
  2. Real estate investments are “passive” only in the Tax Code! Buying the right property takes work. Maintaining properties — even with a property manager — also takes work. Index funds are truly passive.
  3. Real estate isn’t a free ride to wealth.
  4. Tenants are people and people are not always fun to work with, especially when they owe you money and while they live in your property.
  5. Good tenants are awesome and should be considered for inclusion in the next family reunion.
  6. Bad tenants cause normal accountant’s to reconsider bringing back debtor’s prisons.
  7. People are destructive, especially when they don’t own it.
  8. No money down deals are not the best deal going unless you’re selling a real estate investment course on late night TV (back in the day) or on Facebook (today’s version of late night TV).
  9. Work doesn’t get itself done so stop crying.
  10. All this said, RE can be a powerful income source with plenty of wealth building qualities. And that is why I am back.

The Best Tenant

As I alluded to earlier, I never really got out of the RE business. In 1995 I bought the current office building I rent to my tax accounting practice. This building generates $36,000 of annual rental income and the tenant is the best I ever had! For some reason the tenant and I always agree. Go figure!

How to find the best and most profitable tenants. Buying a rental property is only the first step. Finding an keeping the best tenants is vital to success. Supercharge your real estate profits and make it fun at the same time. #realestate #investmentproperties #tenants #rentals #profitsSo, the best tenant you will ever have is you. But if you don’t have a business (treated as an S corp, I might add) this opportunity is unavailable.

There is a runner up option nearly as good, however.

To understand this second option I need to explain my mindset. When researching an investment (or tax deduction, or investment or. . . ) I prefer more than one out.

What do I mean? More than “one out”.

As an example I recently commented that I prefer more than just a deduction for my retirement contributions. This means the tax break isn’t enough on its own. When planned correctly, a retirement plan contribution can open up additional tax breaks. This is the doubling and tripling of benefits I call more than “one out”.

In real estate it is the self-rental concept that provides multiple values: a dream tenant, fills a business need, rental profits and tax benefits all go to my best friend (me) and no bad tenants. Under the Tax Cuts and Jobs Act of 2017 it also opens the opportunity for more of a Qualified Business Income deduction. 

 

Another Awesome Tenant

This Sunday my oldest daughter, Heather, graduates from college. She had a lot of false starts as she found her way and daddy refused to provide a free ride. (The first test of college is getting there. Loans and daddy are not a part of “getting there”. Scholarships, a job or business and hard work are.) 

The best and most profitable investment properties to buy. No matter how high real estate prices climb, profit is made by renting to the right tenant. This fool-proof method of property management can send your profits to the highest ever while virtually eliminating problems. Make being a landlord fun. #landlord #rentals #profit #realestate #investmentpropertiesHeather won several awards along the way and served as an officer in PTK this last year. She has matured a lot.

She also fleshed out a business. She is returning to China this summer after finishing a tour in South Korea teaching English as a second language. 

Her business involves tutoring and she has several product ideas and services coming online. And, smart girl she is, tested everything and never quit just because an idea failed. She learned and grew with each step. And now it is time to move out and tackle the world for real.

And this is where my renewed RE adventure begins.

Heather tried living near the campus while in college, but got an eyeful of the idiocy of the average young adult. She also experienced bad landlords and roommates.

So Heather took control and decided she would pick her roommates this time versus the school or landlord. She wants to keep costs low, sharing the expenses of renting with a roommate, while being closer to her clients (she’s been invited to several local schools and universities to teach). 

She found the right roommate after screening out several. Then she started researching accommodations and running numbers. 

Then she told daddy. Daddy almost lost it!

Rent has changed in the last 20 years! (God, I’m getting old.) Rents were from $850-$1,200 per month on average and they were nothing fancy either. (Yes, we live in a pretty reasonable market yet.)

This caused my accountant mind to start shaking out the rust and think about this situation a bit. It became clear, after a cursory review of available local duplexes and 4-plexes, that it would be better if I bought a property and rented to Heather and her friend. 

And that is where we are at. I’ll purchase a property this summer before Heather returns from her South Korea/China trip and her friend starts her next semester of classes. Both have jobs and adequate income. 

 

Doing it Right This Time

All this assumes you have a responsible child. There are plenty of horror stories of parents buying a home for their child and getting killed financially. 

I would not have considered this even a year ago. (She could have remained living at home with mom and dad if necessary.) But Heather has finally reached the tipping point. Her business has reached critical mass and she has a waiting list looking for her services. 

Heather was ultra picky when vetting potential roommates. She wanted two roommates, but could only find one worth keeping. For now.

You might be tempted in a situation such as this to have your child manage the other units. It’s an insane thought so drop it fast! Heather is a teacher and business owner with no skills in — or desires for — property management. 

Heather and her friend will pay rent to me with a regular rental contract like any other landlord/tenant relationship. We do it by the book.

The remaining unit/s (I have my eye on a 4-plex, but will settle for a duplex) will be managed by a professional property manager.

I have no interest in managing RE ever again so a manager is a must. The only advantage of having my daughter live there is the updates on the needs of the property (something needs fixing or updating). Unless she says anything, the other tenants will not know her relationship to the landlord. Squeak, squeak. 

 

Final Notes

This wasn’t a numbers post on how to buy the right property at the right price; I did that previously

This post should help you start thinking about the additional benefits of RE ownership beyond the mere rental income (the doubling and tripling of benefits). 

Renting to your own business is a no-brainer in most real estate markets. The high-priced coastal cities of the U.S might be an exception, along with Denver. Of course that could change over time.

Rent has an element of profit (or at least it should). Slumlords take shortcuts to keep their rents lower, but you don’t want to live there. Good properties, good apartments, cost money. And good landlords are as hard to come by as good tenants. There are plenty of them out there but they are already renting their apartment from a good landlord and have no intentions of leaving anytime soon.

The next best option is renting to a responsible family member. This isn’t an easy road. My youngest daughter isn’t close to being there. Heather made the leap recently which gave me the idea and hence this post.

Doing it right means buying the right property that cash flows out of the gate and having a property manager handle the rest. 

Heather may find additional tenants for me from her work, but it still will all go through the property manager. I’d rather pay a fee than spend time managing the property

It’s the right thing — and profitable — thing to do.

And, of course, this assumes you buy a quality piece of real estate and maintain it.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.