House Flipping Taxes | Do You Need a CPA?

house flipping taxes

As your fix-and-flip business grows, the complexity of your reporting to the IRS grows as well. Not only will you be required to keep accurate records of income and expenses, you will need to know how to calculate basis and depreciation. Also, it is critical to have a solid understanding of what can and cannot be listed as deductions from your house flipping taxes.

You must be as precise as possible in preparing your tax returns to avoid triggering an IRS audit. The last thing you want is to have errors come back to haunt you in the future. Unsubstantiated losses, erroneous write-offs or incorrect depreciation calculations can wreak havoc when they don't match the math of future returns. If you haven't yet, you may at the point where the best thing you can do for your company (and your sanity) is to hire a tax accountant. 

Find a CPA Who is an Expert on House Flipping Taxes

By law, CPAs operate as fiduciaries, which means they have a legal duty to act in your best interests. Non-CPA accountants are not considered to be fiduciaries to their clients. So, when it comes to finding an accountant to handle your house flipping taxes, a CPA is a wise choice. However, you should also be aware that not all CPAs are equal when it comes to tax advisement experience and expertise.

Do not make the mistake of hiring a CPA who is unfamiliar with the specific complexities of house flipping taxes. Your brother-in-law who is a CPA may be great at financial planning and tax preparation for the general public, but unless he is aware of the complexities of real estate tax law and actively practices with clients who are fix-and-flip investors, he is not the best choice for your business needs.

Some CPAs Don't Have Any Tax Reporting Experience

Never assume that the title "CPA" means the accountant you are considering has experience in  tax reporting, tax advising, accounting, and financial planning. Many CPAs are more knowledgeable in tax codes as a result of rigorous CPA licensing examination and continuing education requirements. But, some CPAs have no experience at all with tax reporting and don't even prepare their own tax returns.

Get a CPA Referral for Your House Flipping Taxes

The best case scenario for finding a tax accountant for your fix-and-flip business is to ask trusted colleagues, friends or family members (who are also in or associated with the fix-and-flip business) for a referral.  If you are a successful fix-and-flip investor, you should have plenty of contact with other industry professionals who might be willing and able to point you in the right direction. If you don't know anyone, or your contacts don't have suggestions, start with an online search for CPAs who specialize in real estate. Drill down from there to find those who know the specifics of fix-and-flip investing.

Do Your Due Diligence Before Calling a CPA

Before you call or email a potential accountant, be sure to thoroughly research their reputation. Search opens in a new window, or check with the appropriate licensing agency for your state, to make sure the individual's CPA license is valid and they are in full compliance with the laws and ethics CPAs are bound to uphold. Also helpful is any feedback you are able to find from former or current clients who may leave reviews on websites like Google or Yelp.

To narrow your list of prospects down to a few, call or email each of the CPAs you are considering. Find out how much experience they have with real estate investors, and more specifically, with fix-and-flip investors.  If they have current clients who flip houses, there is a good chance they are current with the IRS regulations and are knowledgeable about the loopholes and deductions specific to your business. 

Questions You Should Ask Your CPA Prospects:

Do you charge for an initial consultation?
A reputable CPA should provide a free consultation to determine if they are a good fit for you and your business.

Do you have a PTIN ?
If they do not have a Preparer Tax Identification Number, seek out a different CPA.

What is your experience advising and preparing tax returns for fix-and-flip real estate investors?
If they are put off by this question, or cannot give you an understanding of their real-world experience with real estate tax law and fix-and-flip investors, move on to the next prospect.

What is your availability for ongoing advice?
This is a critical question, as you will want to work with a CPA who can serve as an adviser year-round, not just a tax preparer during tax season.

What’s your experience with the IRS?
Have they defended an audited client?  Have they been required to provide a written response to an IRS audit? What was the outcome?

Who will be preparing my tax returns?
Will you benefit directly from this CPA’s experience and expertise, or will a junior account be doing the work?

What software are you using?
If they are not using tax preparation software, that is a red flag. Computer software will catch any errors human eyes overlook. Your CPA should have this in place--at least as a back up, if it is not their primary tax preparation method.

Is filing electronically an option?
A reputable CPA will offer this option.

How will I share my records with you?
Your CPA should have a detailed digital tax organizer they offer to send you that will help organize your business and financial records. 

Are you bullish with finding and exploiting loopholes and write-offs?
If you are looking for a CPA who pushes the envelope vs. one who is more conservative and will proceed with caution, know this beforehand and choose your CPA accordingly.

What is your billing protocol?
Will you be charged a fixed rate, or will services be billed hourly? (If billed, will the CPA provide backup for all billable hours?) 

What happens if the IRS audits me?
How will the CPA defend you against an IRS audit? Can they give examples of other instances where a client or clients involved in real estate investing were audited and what was/were the outcome(s).

If you perform your due diligence in finding the right tax accountant for your fix-and-flip business, not only will you benefit from their advice year-round to help fine-tune your business practices,  you can also spend the weeks leading up to April 15th feeling far less stressed knowing your tax return preparation is in capable hands.

2 Comments for “House Flipping Taxes | Do You Need a CPA?”

  1. It’s great that you mention that a CPA can help make sure you comply with all applicable tax laws if you want to start a business flipping house. My wife and I are thinking about fixing and flipping houses as a business, so we will probably want to employ a CPA. I’m going to look for a reputable CPA in our area to hire.

    1. Thank you for your comment, Fred.

      Yes, it is definitely important to make sure you are in compliance. Also, a CPA with direct knowledge of the fix and flip industry will know how you can best benefit from industry-related write offs that can help lower your tax burden as well.

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