From time to time, we outgrow our current accountant. At that point, it is always wise to switch to another accountant that is best suited for your needs. When this occurs, you provide the new accountant your prior year tax return. It is absolutely crucial you provide them with the full return (including schedules) to provide the most amount of information. Without this, the information from your prior year return might not transfer appropriately and you could be missing out on thousands of dollars in deductions. In this article, we will go through the top two tips to make sure your return carryforwards are transferred appropriately and how you can check them for accuracy.
1. Transferring of Your Depreciation Schedules For Each Property
When you place a property into service, a depreciation schedule is created. For how to calculate basis, check out this article. The depreciation schedule is a listing of all the depreciable assets for a given property. It is crucial the “Ending Accumulated Depreciation” ties to the beginning of year depreciation. The reason is because you could be over or understating the amount you’ve previously taken. This comes into the picture upon sale. For discussion of depreciation recapture, see article here. Additionally, if the full value of the asset was not put in, you could be potentially underreporting the amount of depreciation you are legally entitled to.
The reason you need to pay close attention to this is because this is all manually done by the preparer, meaning there is room for human error. We all make mistakes and there are items during our busy season that may not be caught. For this reason, you need to be diligent and ask questions if things are unclear. Make sure this is included in your fee because you want to ensure you are able to ask enough questions so you understand your taxes enough to know your accountant is correct. For reference, the depreciation schedules are typically after form 4562 which shows the depreciation for each property. For reference, a depreciation schedule is listed below.
2. Carrying forward losses on properties from prior years
Depending on how many properties you have and your income for the year, you may be unable to take losses in the year in which they were incurred. The good news for real estate investors is that these losses can accumulate until the property is sold. When the property is sold, the losses are released and can offset some or all of the gain. As such, it is important that each property has the correct amount of loss allocated to it.
There are two places to check. First, you should see row 1c (prior years’ unallowed losses). If you don’t see this, that means your accountant missed all of your prior year losses. You need to make sure these tie out in the aggregate. This is on form 8582.
Additionally, you need to look through your prior return and see your unallowed loss. This is found on form 8582 page 2 part 7 column c. You will see the total unallowed loss. Usually there’s a statement that shows the breakdown by property. The unallowed loss is broken down by property.
There are quite a few moving pieces when switching accountants. Starting on the right footing with getting all of your data transferred over is the first step. The above article should help any investor looking to switch accountants. There are moments during our busy time of year where things are so hectic and items go missed. As such, you need to verify your CPA is actually doing their job. By doing this, you will be more informed in the process and hopefully maintain the deductions you are legally entitled to.
If you have questions on your real estate tax strategy, you can reach me (Aaron Zimmerman) at firstname.lastname@example.org.
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