During an investor’s journey, there are many times when professional assistance is required. One of the most common questions after explaining our services is, “Do I need tax advisory?”. The answer, as with many things in this world, is “It depends”. In this article, we will discuss a couple of situations that are and are not beneficial for tax advisory.
Situations In Which Tax Advisory is Helpful
1. Being a real estate professional
As discussed in a prior article, the real estate professional status is one of the most beneficial statuses for any taxpayer. There are a lot of tools at your disposal to minimize your tax. It is especially useful in these situations because a real estate professional might be able to write off losses against other active income. As such, it is advisable, especially if there is significant activity during the year to talk at least once (ideally more) to ensure the tax benefits are maximized.
2. Purchase and Sale of a Property
When purchasing a property, the main item you need to figure out is the basis of the property. That way, you can know the amount of depreciation you will get annually. This will allow you to plan better for your taxes. For my clients, this service is included in the preparation of tax returns and is generally not an additional fee. Should you acquire a property via a 1031 exchange, that would be extra.
When you sell a property, there are a lot of moving pieces between the sales price, prior depreciation, calculating gain, figuring out the amount of prior losses that can offset the gain, etc. As such, you will want to talk with your CPA to figure out, in advance of a sale, how much tax you may have to pay and/or a way to defer. The fee to meet will be well worth it. At the very least, your eyes will be opened to how much tax you may owe.
3. Significant Business Activities That Require Ongoing Planning
It is many investor’s goals to scale up a significant operation and ideally create passive income. The more properties or real estate businesses, the more the tax code can be used for your benefit. As such, there may be additional opportunities that you could capture that could be helpful. For instance, you could be a realtor and qualify as a real estate professional. Additionally, you may own a few rental properties. During the year, you could purchase a rental property and perform a cost segregation to reduce the income from being a realtor. This is provided certain tests are met. Discuss with your accountant regarding the specific details of your situation.
When You Don’t Need Tax Advisory
1. Just Starting Out
If you are just starting out and only have one or two properties, there are many instances in which it simply isn’t worth sitting down. The reason is because there are only so many tools at your disposal for this number of properties. Don’t get me wrong, there are still significant opportunities for you to save. However, the cost of meeting with your CPA might not provide the value exchange you are hoping for.
2. Your income is too high and you are not a real estate professional
If your income is too high and you own rentals, your losses will not be able to be used in the current year. They will roll over from year to year. If you want to meet with an accountant, you will likely be paying for services that will have minimal impact for your current year taxes. You may save a few dollars from talking with your accountant but those benefits would not be utilized until you either sell the property or generate positive taxable income from your rentals.
It is important to know when you need additional help and further analysis from your trusted advisor, a CPA. However, there are many times in which help is not needed. Either way, the value exchange needs to be there for you, the client. The worst thing to happen would be for you to not feel like you received a lot of value for the dollars you will be paying. As CPAs, we hope we are one of your best investments. The above situations outline some (but not all) in which tax advisory is helpful and unhelpful.
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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