How Hiring a Tax Strategist Could Save You Thousands (Or More) Every Year
In this article, I’m not going to give you a detailed list of every way you can save on taxes.
I am going to encourage you to find someone who has that list and can tell you precisely what you need to do to save on taxes.
This discussion could lead to your most strategic move to preserve and create wealth by saving on what is likely your largest annual expense: taxes.
Note that if you are a casual investor or if you don’t plan to build significant wealth at some point, this article may not interest you.
It will require effort, thought, and money to implement what I recommend here, and it will only be worth it with the appropriate economies of scale.
Unless you are a CPA or tax strategist, there’s no way you can do this effectively yourself!
Ed’s Story
In 2012, my business partner and I were developing a Hyatt House hotel. We wondered if there were ways to structure the ownership to maximize our legal protection and minimize our taxes.
I Google searched “how to find a tax strategist.” That’s how I found a guy named Ed.
Ed had blogged about his sad tax story. Ed is a successful multifamily real estate operator and real estate broker who made a lot of money for a lot of years.
Sadly, he lost a large percentage of it along the way.
How?
By overpaying the IRS.
Based on Ed’s income, his annual federal income tax bill of about $120,000 seemed reasonable to him. But one day, Ed read an article about tax-saving tactics for real estate investors. He met with his CPA for lunch to share them.
The CPA agreed they were great ideas that Ed should implement right away. He suggested Ed may want to go back and amend his returns for a few years to capture some of these benefits.
A bit irritated, Ed pressed his accountant further: “Why didn’t you tell me about this before?”
His CPA answered (to this effect): “You pay me to do your taxes and oversee your bookkeeping. You don’t pay me to be a tax consultant. I just take what you give me and file your returns.”
That was Ed’s last lunch with his now ex-CPA. He ditched him. But before he did, Ed interviewed several highly recommended tax-preparers. But Ed didn’t just hire a better CPA.
Ed hired a tax strategist.
In the decade since he hired a tax strategist, he has paid exactly zero dollars in federal income taxes.
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands”
This exact situation won’t apply to everyone, but even if you could save half that much, wouldn’t you want to know how?
To be clear, I believe Ed is a high-integrity guy. He is conservative by nature and believes in paying his fair share, as do I.
But to achieve these savings, you must understand the rules. Or know someone who does.
What to Look for in a Good Tax Strategist/CPA
Hopefully, your CPA is better than Ed’s. But I encourage you to be sure he or she is highly ethical and, simultaneously, eager to save you money on taxes.
You’ll want a reader/researcher. Not just a CPA who got their license and fulfills their annual continuing education requirements. This is someone who aggressively seeks out every possible tax advantage for you. Someone who knows the rules and applies them.
You’ll want someone who is not afraid to use every legal deduction and who’s ready and able to defend you if the IRS comes calling. I had a routine IRS audit in 2001 that turned into a long, drawn-out ordeal. I was glad to have a great CPA who represented me well. I never met with the IRS agent, and he only found one $180 item he disagreed with.
For most, this person will be an integral part of your team. Someone who sets up systems to stay current on your cash flows, expenses, and deductions. It’s frustrating to learn you should have been tracking something all year to save on taxes, but you didn’t know until filing time.
You’ll have to determine if you want someone available to consult year-round or someone who is mainly focused on your tax return. Either may be fine, but you don’t want surprises. Note that the best time to engage with most busy tax professionals initially is not in the thick of tax season.
Assuming you invest in real estate either actively or passively, you’ll want an individual who specializes in real estate. It may be someone who invests in real estate themselves, but it should certainly be someone who focuses on clients who do. You will want to ensure they have significant experience dealing with multi-state tax returns, self-directed IRAs, and self-directed 401(k)s.
You may want to hire someone with multiple certifications, such as an Accredited in Business Valuation (ABV) credential or membership in the National Association of Tax Professionals or the National Association of Enrolled Agents. But this is less important to me than their expertise and specific focus on real estate.
How to Vet a Potential Tax Strategist/CPA
A great tax strategist/CPA can save you money, save you time, and help you focus on your real business or job.
As a key asset for your business, you need to treat them as such. Interview them like you would a new executive. Check their references. Read all the reviews you can find. Perform background checks.
Don’t be afraid to ask them hard questions. See below for a few examples.
If I started working with you and your firm, would I actually be working directly with you? If not, what is the background and experience of the person I would be working with?
What does your typical tax strategy consulting process look like?
About what percentage of your clients heavily invest in real estate?
What are the typical strategies you recommend for someone with a W-2 job?
Tell me about a recent regulation change that impacts real estate taxes.
What’s your experience defending clients before the IRS?
What’s a big mistake you’ve made on someone’s tax return? How did you leave money on the table for yourself or a client and what did you do when you found out?
Would you consider your advice to be aggressive or conservative? Can you share some examples?
If I have real estate in multiple states, how do you determine which states I must file in and which ones I can avoid?
How much do you charge per state filing?
Test them out. Note their response time to emails, texts, or calls. Even if they’re numbers-oriented and not particularly salesy, you should expect a high customer service standard.
Potential Tax-Saving Strategies
I hired the same tax strategist/CPA that saved Ed about $120,000 annually. He has saved me a boatload of taxes as well. My tax strategist teaches his clients…
The importance of direct investment in real estate (as opposed to REITs, which don’t pass through losses from depreciation on a K-1).
About the power of cost segregation studies. Many commercial real estate operators accelerate their depreciation schedules on behalf of investors. Their investors can utilize these losses for years.
How to defer taxes through a 1031 exchange or a “lazy” 1031 exchange.
How to reset your asset basis to zero at the time of death, allowing heirs to potentially pay zero capital gains or depreciation recapture taxes at the time of inheritance.
How to “partner with the IRS” to use self-directed Roth and SEP IRAs, Qualified Retirement Plans, and other vehicles to pay as little tax as possible.
How to hire your kids in your business and effectively save a lot on taxes until they are 18.
How to set up a medical expense reimbursement plan to deduct your medical expenses.
How to correctly classify expenses versus capital improvements to maximize deductions.
How to avoid passive loss limitations by qualifying as a Real Estate Professional according to IRS guidelines.
Concluding Thoughts
I am aware that many of you know about all these strategies and more. And most good real estate-oriented CPAs are knowledgeable about them as well.
But I’m writing to stress the importance of implementing them consistently and correctly. And one way to do that is to partner with a strategic CPA who specializes in real estate and who hates to see you paying more taxes than you should.
DISCLAIMER:
This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing. Information and any opinions contained in this article have been obtained from sources that we consider reliable, but we do not represent that such information and opinions are accurate or complete, and thus should not be relied upon as such.