Why I Specialize in Both Tax and Real Estate as a CPA and Investor

In this post, I want to discuss with you some questions I’ve gotten over the years about why I work as a real estate CPA as well as an investor and broker of property.

If any of you know me, then you’ve probably heard me repeat over and over again that I believe real estate is the best path towards building wealth. If you have a long term mindset and are happy to not have flashy, high risk, high reward outcomes, then over the course of your career and your life, investing and accumulating real estate will put you in an excellent position to retire, even if it appears boring or unattractive at first.

A very crucial element of real estate investment, particularly in the US, is the significant amount of tax savings and the area of tax law surrounding real estate ownership. With the exception of only a few other areas of tax law, real estate taxation is the most favorable to investors of any asset class. So when we analyze a real estate opportunity and compare it to alternative, non-real estate investments, we absolutely must take into consideration the pre and post tax benefits of every transaction. This is why I strongly believe successful real estate investors equip themselves with a decent understanding of tax law and then they collaborate throughout the year with a real estate tax professional (like me) to clarify and identify specific areas of the law to take advantage.

Industry Specific Knowledge

It is rare in the tax profession to meet a CPA who works in the industry and also does the taxation for it. That’s because there generally aren’t strong overlaps to say, running an airline and being a tax professional, or owning a hospital and practicing tax at the same time. Real estate is one of the few areas where a tax professional can engage in both activities very competently and bring a perspective to the table that is different than someone who solely specializes in one area can bring.

In the world of real estate transactions, two individual can analyze a prospective deal, and one can conclude it’s a great purchase and the other conclude it’s a bad purchase. They’d both be right. A deal is good one if it meets the investors criteria, whatever that may be! For example, a small duplex on a block might be too expensive for the cash flow investor because the net income from the property barely covers debt service, whereas the developer finds it a bargain because he sees the value in building something valuable on the property.

Conversely, an investor who accumulates property in a primary market, such as Los Angeles and San Francisco, might be willing to pay a bit more for a property in a secondary market in Arizona or New Mexico because the taxable income generated from that property will be eaten up by all of the depreciation generated from their property holdings in LA or SF. Again, it really depends on the investment criteria.

Real Estate Professional

Of course, let’s not forget about IRC 469(c)(7) - which unlock passive losses for the real estate professional! As long as you both: 1) Spend 750 hours engaged in real estate trades or businesses each year AND 2) More than 50% of your time is spent on those type of activities - then you’re on your way towards deducting those tax losses triggered by depreciation (probably following a cost segregation study) against your income from other, non-real estate related sources. Great outcome and one I love taking advantage of each year!

Deal Flow

I’d be remiss to point out that I love looking at prospective opportunities to acquire more properties. I’ll be buying real estate for the rest of my life and love staying active in this space. Looking at prospective deals also gives me insight into the types of challenges my own clients face in their real estate journey and helps me anticipate tax considerations for them. Nothing brings me more joy than reading their minds and understanding and providing guidance over their own deal structures.

Conclusion

So if you’re looking at a rental property or development opportunity and want to chat through some of the ways to strategize and save on taxes, you should contact us! Click here to contact us.

-Stephen Morris, CPA, MBT, CCIM