As a real estate investor, not only do you want a tax advisor but a Real Estate Tax Specialist. The problem is to find one. Many of my students tell me when they move to a new town or city, it’s easy to find a good doctor, dentist, real estate attorney, mortgage broker and real estate agent. But what they can’t seem to find is a Real Estate Tax Specialist – a CPA, accountant or attorney who specializes in real estate and has knowledge in the tax reduction strategies pertaining to rental properties, commercial property, wholesaling, rehabbing, foreclosures, seller financing, paper, options, lease-options and the other facets of real estate investing.
The 80% Problem. When it comes to real estate tax planning, over 80% of CPA’s (or other so-called tax advisors) are incompetent, unconcerned, self serving or all of the above. Plus, there is an 80% chance you will end up with the 80+%, or you already have one of them. You therefore need to avoid them, or get rid of them. Reason: Bad tax advisors cause more people to pay more taxes (and get in IRS trouble) than the IRS could ever dream of. How do I know this? From articles written in top financial magazines (such as Money Magazine); from nationally known authors; from my own experiences having taught real estate courses to CPA’s across the country for several years; and from the input of my many students across the country. Reports from these sources reveal how real estate investors have unnecessarily paid literally thousands (even ten’s of thousands) of dollars in taxes – hard earned money down the drain that could have been saved and reinvested for more cash flow, more equity and greater wealth. (See my article, Saving Taxes Makes You Wealthy).
So the bottom-line reason for avoiding the wrong advisor is to increase your wealth by way of saving taxes. And to keep you out of trouble with the IRS via audit-proofing your tax returns (which is discussed in other articles).
While a detailed discussion is beyond our scope, here is an overview of some suggestions.
First ask for prospects and then references from fellow investors, investor associations, real estate attorneys, etc. When you are checking with the reference, be specific as to why they like the advisor. For example, Was it how they creatively structured your return? Did they come up with real estate tax-saving ideas that others did not think of? Were they very thorough by explaining your tax situation? Did they call you during the year to make tax-reduction suggestions? Do they encourage pre-year-end tax planning? If the reason is too general as to why the referral source likes the advisor; or more personal than business, this may not be a good reference.
Once you have two to four prospects start to call them. Introduce yourself as a "real estate investor" inquiring about their services. Tell them specifically what you do as a real estate investor such as you are in rental properties, commercial properties, quick sale flips, rehabbing, foreclosures, subject-to’s, paper or whatever. Inform them, "You have some questions to ascertain if there could be a mutually beneficial long-term professional-client relationship between the two of you. You respect their time and that you will be brief and to the point as possible."
TIP 1: This shows professionalism and respect on your part. Afterall, you also need to sell yourself as a professional competent real estate investor. Yes, while there are incompetent advisors, there are also incompetent investors who you obviously do not want to be because top notch tax specialist will also be selective.
TIP 2: Do the above initial interview by phone; NO email or fax. You get a much better gut reaction when you talk to people and hear them talk back to you. Then ask. – Would I be the type of client that would interest you and fit your capabilities in real estate tax law". Pause, and wait for a response. What you are doing is weeding them out right from the very beginning just as you astutely do when screening tenants.
If the prospect’s response is positive then state and ask this, "I do not at this time expect you to give me a no-charge detailed tax-reduction plan. But again, can you assist me in improving my tax situation as a real estate investor and could you please give me one or two brief examples as to how you could do this?" Pause, and wait for a response. Again, you are weeding them out from the very beginning just as you do when screening tenants.
Alternatively or additionally, ask at least one specific question, being brief and to the point. Here is an example of one that I think puts the prospect to the acid test.
"I am thinking of selling one of my investment properties at a large profit; what would you advise on not paying capital gain’s taxes?"
Be on the alert for this response… "The capital gain tax is only 15%, just pay it and get it over with". It amazes me how such knuckleheads could easily tell you to pay for something you can legally avoid paying, and when it’s not their money. Moreover, not only is this poor advice, it’s also incorrect as in most cases the "total" capital gain rate is not just 15% (as if that’s not enough!). As I teach in my 1031 exchange courses, the 15% is just the federal capital gain rate, but there is also federal depreciation recapture which is at higher rates, there is also federal AMT at higher rates and other hidden federal tax liabilities along with state or local taxes. Thus, your total rate on gains could be 25%, 30% or even higher. Obviously, you do not want this unknowledgeable prospect with this type of negative response. The advisor that you want will suggest to do a 1031 exchange and may also mention other selling tax strategies that I cover in my home study courses. Other specific questions could be on "maximizing deductions on rental properties" or "saving taxes on wholesale flips". Again, if you do not get a favorable response, move on.
Fees should be addressed last. Reason: Entrepreneurs look for "value" first, then "price" later. They know it’s not what you pay, it’s what you GET. Yes, you want to address fees and not be ripped off. But being cheap will cost you in the long run, if not in the short run.
If the prospective advisor answers the above questions to your satisfaction, you should set up a fee-paid tax-reduction consultation with them. Distance-wise, if they are not too far away you can meet them. If they are far away (many good ones will be), then the consultation can be done via the electronic highway – phone, fax, email, as well as regular mail. This first consultation should generally cover the following:
Most free consultations are really sales presentations in disguise. Typically, the prospective advisor will endeavor to look their best, sell you their services and withhold giving concrete advice. Essentially it’s a "BS" session. One of the primary reasons for the free meeting is for the prospective advisor and prospective client to get to know each other and see if there is good rapport, chemistry, etc. However, the same can be accomplished in a fee-paid consultation; but even more so as you can better test the advisor’s technical ability because they are being paid to give you hardcore advice, not "BS" or rhetoric.
This is a frequent BIG mistake. If you can find someone local, then this is ideal. However if the field is not crowded with true real estate tax specialists, then the "ideal" is not always possible. As I just told one of my students, "local guys" have cost thousands of investors millions of dollars in savings! With today’s technology we are closer to each other then ever before, despite being many miles way. Don’t let physical distance get in the way of money-saving advice.
At this point you should already know if your present advisor is one of the forbidden 80%. If they are, they are mostly likely costing you big time and you should stop the bleeding and terminate them ASAP. But if you have had them for a long time, you may want to give them a last chance with the idea that they may have an epiphany and convert to a RE tax specialist. But this is highly unlikely. If you have had them for a long time or there is a close relationship, then you may find it more difficult to do the termination. Quite frankly, I personally would not. If this bean-counter were costing me and my family a lot of money every year, not only would I not have a problem giving them the axe, I would also consider filing a malpractice suit (unless it’s your brother!). You should have the same attitude. This is not personal, but business – BIG business – the finances of you and your family. Remember, NO one cares about your money like YOU. OK, you are not as heartless as me (even though this birdbrain has been a financial detriment). Then here is what I suggest – meet them in person and nicely say something like this, (their first name) "As a real estate investor I am in a new world of business opportunities and my tax situation will dramatically change and so will my financial status. I know you have been my tax advisor for a long time. However, I must make an important business decision for myself and my family and that decision is to terminate your services, effective immediately. Because this was a difficult decision for me, rather than just send you a cold letter or email, I wanted to take the time to tell you in person. Please do not take this personally as this is a business decision for the financial well being of my family. Within 10 business days please send me all back-up schedules, such as detailed depreciation schedules. Thank you for your understanding and goodbye."
You can do the above graciously but be assertive and to the point. Don’t beat around the bush, don’t make this a sad occasion, don’t make this a Requiem Mass. Just make it what is – an important business decision for the financial health of you and your family.
A number of my students have had the costly, unpleasant and exasperating experience of being through several rotten advisors. They’ve had enough. Accordingly, they do not have a tax advisor and may, on occasion, only use a real estate tax specialist on an as-needed-basis, usually for a specific matter. With my home-study course the documented tax strategies are already in place plus they have my ongoing Q&A helpline. For tax preparation (individual and business), they employ easy-to-use software such as TurboTax. They also hire a good bookkeeper (easier to find) who ably does a lot of the work that CPA’s do, but at a much lower cost. Not only do they save thousands in taxes but also in fees for what often ends up being wrong costly advice. This may not be for everybody, but one thing is for sure… having NO tax advisor is a heavenly dream next to having a bad one.
Al Aiello is a regular guest speaker at CT REIA. Go here for the current list of upcoming real estate investing seminars in Connecticut.
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