A great real estate tax accounting can help you improve cash flow and potentially open the door for expanding your property portfolio
Having a good real estate tax accountant as part of your team will help alleviate some of the stress associated with running a rental property, help you improve your portfolio’s profitability, and ensure that you file an accurate tax return.
As an investor, you should already be regularly using landlord accounting software to digitize receipts, keep your books up to date, gain insight into your portfolio’s finances, and run reports for tax time. A CPA or property tax accountant can make a great addition allowing you to delegate to their expertise more nuanced and complex tasks such as managing depreciation schedules, business structuring, and tax preparation and planning. The responsibilities mentioned above if executed poorly could cost you thousands in the long run.
This article outlines five reasons why great real estate tax accounting will be the impetus for more significant profit and potentially open the door for expanding your property portfolio. Additionally, this post also touches on the importance of selecting the right accounting professional for your current situation.
A real estate accountant is a person who submits financial strategies and provides reports based on planning, investment, budgeting, and of course, taxes. Further tasks also include investment analyses, appraisal coordination, and evaluating assets for the property owner.
Many property investors only really contact their accountant when filing tax returns, and then the line goes cold – that needs to change. Regular contact with your real estate tax accountant will allow you to form a rapport by which the two of you can devise strategies.
A person who lives and breathes the U.S. tax code will be cognizant of the numerous loopholes and fines if not executed by the book. So there’s no shame in giving the onerous tasks to a separate person that has built their career on navigating these complexities.
For example, your real estate accountant will be familiar with routes you can undertake to be eligible for property tax deductibles. Essentially, when a landlord undertakes a certain number of hours on maintaining their property, they’re entitled to deduct unlimited passive losses from their original income.
Read, How to Qualify as a Real Estate Professional and Reduce Your Taxes for more information.
There are regular changes and adjustments to the U.S. tax code, additionally, state and local jurisdictions might have their own idiosyncrasies which you need to be aware of. A close relationship with your accountant will allow you to prepare for any changes or unexpected twists and mitigate any potential financial losses or even benefit from these changes.
For example, the 1031 exchange program allows investors to swap one investment property for another while deferring capital gains taxes. Under President Biden, however, the 1031 program is at serious risk of being overturned. Your accountant can help you plan for such eventualities ahead of time to reduce financial risks.
Mastering trends in tax changes is a tax accountant’s raison d’être and many will source information relevant to their client’s investment portfolio to help them improve their cash flow and reduce their taxes.
Your real estate tax accountant or CPA will be able to assist in advising an ideal method of structuring your real estate investments to minimize risks.
For example, they can advise objectively whether or not you should be running your rental business as a sole proprietorship, limited liability company (LLC), or even an S or C corporation. Finally, your accountant will discuss options and can ultimately help determine the best course of action regarding your legal entity title depending on your circumstances and plans.
Although meticulous bookkeeping is of great importance, e.g. digitizing receipts at the point of sale, and regular income and expense tracking, having real estate tax accounting professionals oversee your books will help ensure accuracy and help you take advantage of all the available deductions helping to increase your annual cash flow. In addition, a real estate tax accountant will be well-aware of your current finances and will be able to advise on the prospect of leveraging existing equity to invest in a new property and expand your portfolio.
A real estate accountant may also be able to introduce you to like-minded property investors, allowing you to expand your network. This is important because it allows you to get information on market trends, and be amongst the first to hear of new investment opportunities.
Additionally, if you’re looking for new financing opportunities to expand your real estate portfolio, they may also be able to put you in contact with potential investors when traditional financing isn’t an option.
There are plenty of real estate tax accountants and CPAs. A quick search for a “real estate CPA” in your area will bring up dozens of results. The difficulty though is finding one whose methods and services align neatly with needs.
Ideally, you’re going to want to find a real estate tax specialist who is experienced with real estate investor clients and is aware of the best methods of both bookkeeping and strategic planning. For example, an accountant who develops reports on profits, development expenses, and operational costs will save you much time dealing with the IRS. This individual will also provide insightful reports like revenue cycles, cash-basis income statements, lease abstracts, and more.
The various features of specific property managements software include tools that may make both you and your accountant’s jobs a lot simpler. Landlord Studio, for example, allows you to generate and share professional accountant-approved reports instantly. Additionally, you can give your accountant view-only access to these reports so they can stay up to date with your finances throughout the year. This automation saves everyone time and money.
Finally, a quality property tax accountant should inform you of the various business structures, legal protection levels, and a fiscal insight into hiring more expertise. If you chose to hire another entity(ies), the accountant would advise on financially conscious hiring strategies.
It’s safe to assume that the addition of a real estate tax accountant is in itself an investment. Although the benefits are not necessarily noticed after 30 days, you’ll pick up on tips and see long-term benefits due to their fiscal strategy.
Nevertheless, it’s essential not to let your bookkeeping skills dwindle now that you have a dedicated professional. Of course, you will still need to be just as vigilant regarding expenses and receipts – maybe more than ever. But, if you supply the necessary documents, you’ll have a happy property tax accountant who can begin their navigation through legal loopholes.