Is it a good idea to get a CPA at least one time to learn?

[Slow2FIRE]

I forgot there was a tax specific forum and posted in the "services" section asking for a CPA in the Phoenix area.

Our tax situation just became much more complex and we are stepping into unknown territory for us:  We just acquired a rental property.

Additionally, we made two moves last year and I was pulling my frickin' hair out of my head trying to resolve the taxes with software.  Since we moved again this year, add the complexity of a rental property to which we made capital improvements, and could be tapping the Roth limits on household income (depending on rent calcs, deductions, etc) I think we need help to at least learn this one time.

Does it seem like a good value in our situation to pay for a CPA?  I am expecting we'd have to pay somewhere in the neighborhood of $500 to $1000, but don't really know yet at this point.  Money well worth it? 

I have the added benefit of being a federal employee...and the media sure does like to make a big deal of it if feds screw up on their taxes!

...lastly if anyone is a CPA in the Phoenix area or has a good recommendation, please private message me!  Thanks!

[Yokan]

I think hiring a CPA is worth it. I had two rental properties before hiring one, but she didn't really charge that much. (like $500) I'm a CPA too, but not a tax one so I knew I could do it if I wanted to, but it was nice having someone else confirm my understanding. Especially the first year I think it's worthwhile, since they can calculate the correct cost basis and help you determine Capital Expenditures vs. repairs and maintenance if you have to do a rehab after you buy it.

After the first year it's just mainly keeping track of expenses and calculating depreciation, which you could probably do on your own with little research. Just make sure you find one who understands rental properties. You'd be surprised how many CPAs have never worked with a client that has rental properties.

[DavidAnnArbor]

Yes a well-trained experienced CPA is the best kind.

[CareCPA]

If you do decide to go with a CPA, I believe geographic area is probably less important than subject-knowledge area. What I mean by that is you don't need to limit your search to Phoenix, but if you are going to continue with rental properties then you may want to limit your search to CPAs who have experience with this. They are going to be more knowledgeable in the new capitalization rules that came out the other year, and they are going to have a much easier time with like-kind exchanges if you explore that route in the future.

You may place a higher priority on being able to meet with your CPA face-to-face, so feel free to ignore half this post, but do make sure your CPA has real-estate experience.

[Vagabond76]

Figuring out taxes for a rental property is not rocket science and does not require a CPA.  You can deduct all of the ordinary and necessary expenses you incurred during the year.  This includes taxes, interest, homeowner's fees, advertising, management fees, a once-a-year visit if out of town, legal/professional fees, and small repairs.

You can also claim depreciation as a deduction on the structure (but not the land)...1/27.5 per year.  For my rentals, I subtracted the tax valuation of the land from the purchase price to determine the tax basis.

You can also depreciate the capital improvements, but over a shorter time frame (5-, 7-, or 15-years).  This is like renovations, carpet, HVAC.

I use Turbotax to walk me through the calculations.  Never had any problems with the software and the IRS hasn't questioned anything.

[tralfamadorian]

If the moves were stressing you out last year, then yes, I would recommend getting a tax professional for this year.

But I would highly recommend looking for an independent EA vs. a CPA.  CPAs are trained in lots of things, one of which is taxes.  EA's do taxes and represent people when they are audited.  That's it.  Because the designation is not as well known as the CPA, I've found them to be much more reasonable.  For example, two years ago we had our taxes done by a local respected CPA firm- $1,700.  The next year we switched to an EA- $550. 

Here is national registry to find EA's in your area: http://www.naea.org/

[Vagabond76]

Did you ever start with one of those rentals as your home?

Yes.  You have to allocate recurring expenses such as homeowner's fees, interest, and insurance.

Are solar panels depreciated the same way?  What if I took the federal solar credit and received rebates from the utility for the solar panels?

Solar panels are depreciable, but only based on what you paid.  In other words, you cannot depreciate the credits and incentives.

Can I consider the landscaping, fence and back patio as capital improvements if they were done 1 month before I moved out and turned it into a rental?

Yes, you can depreciate the entire property except land.  You can also deduct expenses made before you moved out if you incurred them in the anticipation of making the property a rental.

How do I calculate my AGI (or it MAGI) for purposes of depreciation?

I don't understand the question.  Depreciation on a rental is not subject to (M)AGI.

  Also how does the rental income impact my overall income for AGI/MAGI in determining Roth IRA cutoffs? 

You will have to run the numbers.  In six years, my rentals have never increased my MAGI for Roth IRA purposes.  Two years it lowered it because my total taxable income was less that $100k.

We are borderline on Roth IRA depending on how these things playout ($208K pre tax earnings + almost $40K in rental income minus rental expenses).  Do I file for depreciation and somehow suspend the use of the credits due to my income being above the $101K to $150K threshold?

You have to take the depreciation deduction.  I don't understand suspending use of credits?  My experience is that deductions more than cancel out rents received.  Once my interest payments go down and have positive taxable income from the rentals, the loss carryover from prior years will kick in.

Also, is it correct to take the tax deduction for moving when I work from home?

Moving expenses are deductible, even if you don't work at home.  Moving your office is deductible.

I haven't yet taken the deduction for office furniture used in an at home office (I think that is schedule 191???), I also need help walking through that properly HOWEVER I can not take the standard home office deduction because I voluntarily work from home. The furniture was purchased after I started working from home expressly for the purpose of a home office and is not otherwise used.  Also, I need to know what elements of my home office I can count in this deduction.

Generally, an employee's home office expenses are deductible as an above the line (itemized deduction).  There are are substantial limits on the ability to deduct these expenses, such as your total itemized deductions must exceed the standard deduction.  Also, the expenses must be more than the 2% of AGI floor.

This is getting beyond the scope of your original post, which was solely about rentals. 

I have a few more minor items, if you think this can easily be worked out...

Just ask.

[hoping2retire35]

Taxes are of course scary but they are just like any other problem; investigate, ask, research, make a judgement call and go with it.

Depreciation on a rental is kinda unique thing in the tax world. it is not a deductible expense. it is something you MUST do while claiming the rental as a revenue source (assuming you don't ever move back in). depreciate is 1/27.5 of the purchase price, even if it was 10 years ago, and as I did not know, it can also include capital improvemnts which I guess seems a little nuicansed as to the difference between depreciation and a deduction which is the same year or can be spread over (i believe) 5 years.

Your magi comes from your total income. your rental is another worksheet (can't remember which one). Say after total rental income minus calculated depreciation and all allowable deductions you will have net income which will be added to your total income. From that number you calculate AGI & MAGI and other credits and stuff.

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

[Vagabond76]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

[hoping2retire35]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

So if you buy a fixer upper and add a bunch of stuff can that can be depreciated? Does it have to be?

[CareCPA]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

So if you buy a fixer upper and add a bunch of stuff can that can be depreciated? Does it have to be?

As is usually the answer with taxes: "it depends."
In general, if you buy a property to be fixed up for rental, costs incurred to get the building rentable before it is placed in service (i.e. available to be rented) are capitalized. My favorite example: if you paint a wall as part of a larger, capitalized improvement, it must be depreciated. If you paint a wall and don't do anything else, it can be expensed. So you can perform the same action, but depending on the other circumstances it can be treated differently. Once it is placed in service, the rules get more nuanced.

If you are buying larger properties, investigate having a cost segregation done. New rules state partial write-offs are allowed if you can establish what the original amount allocated to it should be. I.e., if you can allocate part of the purchase price to kitchen cabinets as part of the purchase, when you replace those, you can write off the old ones. Otherwise it's all lumped into "building." This is only really cost-effective for an apartment multiplex or large commercial. For single-family homes through small apartment buildings, the cost of the study will be greater than any benefit you'll receive (my opinion).

Depreciation is not optional - if an asset is depreciable, depreciation must be taken on it. The trickier part is deciding what is depreciable and what can be expensed.

No, depreciation and taxes are not rocket science to get them "close enough," but if you want to be correct all the time, it will take a lot of research. I've not seen "Turbo tax said to do it this way" hold up to an IRS audit, so you still need to understand the theory behind why it is being treated a certain way on your taxes. I'm not saying go out and hire a CPA, I'm saying make sure you understand why you are presenting things a certain way on your tax return.

Also be careful with the EA versus CPA designation. There are very good tax people with either, and there are shady tax people with either. The CPA test does cover more than taxes, but a good tax CPA will concentrate solely on taxes for their profession. The CPA has higher continuing education and harder licensing testing than the EA.

Again, note my bias, and take with a grain of salt.

[2buttons]

Yes, CPA is worth it unless you are an expert yourself. I would shop around though. Big shops charge big bucks.  I know a lot of folks are not big Dave Ramsey supporters here, but I found a CPA through his ELP program and his recs tend to have lower fees to start.  They also are somewhat vetted already. 

I have saved thousands each year and paid less than $500 each year for my return, as he has optimized my tax situation repeatedly over the years, and provided good advice on different situations. I also can call him throughout the course of the year with random questions, that alone is awesome.

But I will say with anything, its good to be somewhat engaged and not put them on autopilot.

I also think there are some ways to do background checks on your CPA, but I have never looked into, probably something I should do, just to be sure.

[Gin1984]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

Quick question, when you sell and have to recapture depreciation, do you recapture the depreciation of things like appliances, carpet etc?

[CareCPA]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

Quick question, when you sell and have to recapture depreciation, do you recapture the depreciation of things like appliances, carpet etc?

Technically, yes, recapture depreciation on anything that has been depreciated.
If you're selling an entire house and it has appliances, etc - your accountant (or you) will make a call as to whether to allocate any of the sales price to those items, or if their market value is essentially $0 based on age/condition.

[Gin1984]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

Quick question, when you sell and have to recapture depreciation, do you recapture the depreciation of things like appliances, carpet etc?

Technically, yes, recapture depreciation on anything that has been depreciated.
If you're selling an entire house and it has appliances, etc - your accountant (or you) will make a call as to whether to allocate any of the sales price to those items, or if their market value is essentially $0 based on age/condition.

Can you expand on this?

[CareCPA]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

Quick question, when you sell and have to recapture depreciation, do you recapture the depreciation of things like appliances, carpet etc?

Technically, yes, recapture depreciation on anything that has been depreciated.
If you're selling an entire house and it has appliances, etc - your accountant (or you) will make a call as to whether to allocate any of the sales price to those items, or if their market value is essentially $0 based on age/condition.

Can you expand on this?

Note this is general advice, and not specific to your situation.

Hypothetically, you hold a rental for 10 years. Over the course of those years, you capitalized carpet replacement, appliances, bathroom remodel, whatever the case may be. When you sell the house, you sell the original asset (house and land) plus all the capitalized improvements you've made over the years.
Usually if you sell a house, unless it is a large apartment, there will not be a purchase price allocation in the sales agreement. If there were, it would say something like 80% of purchase price to building, 10% to land, 10% to appliances - in which case you would know how to allocate it for recapture purposes. Without this allocation in the agreement, you may apply a reasonable allocation of sales price. So for example, if your carpet needs to be replaced, but you sold it without replacing it, you may choose to allocate $0 to your carpet "asset" that has been depreciated. As such, no recapture. If your appliances are still good, you may make a reasonable estimation as to their fair market value and allocate that amount for recapture purposes.
Make sure you document all this so if you are ever questioned you have your logic written down and don't have to recreate it.

[hoping2retire35]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

Quick question, when you sell and have to recapture depreciation, do you recapture the depreciation of things like appliances, carpet etc?

Technically, yes, recapture depreciation on anything that has been depreciated.
If you're selling an entire house and it has appliances, etc - your accountant (or you) will make a call as to whether to allocate any of the sales price to those items, or if their market value is essentially $0 based on age/condition.

Can you expand on this?

Note this is general advice, and not specific to your situation.

Hypothetically, you hold a rental for 10 years. Over the course of those years, you capitalized carpet replacement, appliances, bathroom remodel, whatever the case may be. When you sell the house, you sell the original asset (house and land) plus all the capitalized improvements you've made over the years.
Usually if you sell a house, unless it is a large apartment, there will not be a purchase price allocation in the sales agreement. If there were, it would say something like 80% of purchase price to building, 10% to land, 10% to appliances - in which case you would know how to allocate it for recapture purposes. Without this allocation in the agreement, you may apply a reasonable allocation of sales price. So for example, if your carpet needs to be replaced, but you sold it without replacing it, you may choose to allocate $0 to your carpet "asset" that has been depreciated. As such, no recapture. If your appliances are still good, you may make a reasonable estimation as to their fair market value and allocate that amount for recapture purposes.
Make sure you document all this so if you are ever questioned you have your logic written down and don't have to recreate it.

Ugh. could you just do number of years divided by 27.5 for recapture, ie; 2 years equals 2/27.5 for recapture?

[CareCPA]

Question to Vagabond or others; can depreciation be total price plus appliances or is "capital improvements only something "permanent"; does it matter? I thought it had to be something "attached". Also makes me wonder about HVAC....lots of searching to do.

Depreciate the total price. Depreciate the appliances, new carpet, or other fixtures separately only if you buy them separate from the house.

Quick question, when you sell and have to recapture depreciation, do you recapture the depreciation of things like appliances, carpet etc?

Technically, yes, recapture depreciation on anything that has been depreciated.
If you're selling an entire house and it has appliances, etc - your accountant (or you) will make a call as to whether to allocate any of the sales price to those items, or if their market value is essentially $0 based on age/condition.

Can you expand on this?

Note this is general advice, and not specific to your situation.

Hypothetically, you hold a rental for 10 years. Over the course of those years, you capitalized carpet replacement, appliances, bathroom remodel, whatever the case may be. When you sell the house, you sell the original asset (house and land) plus all the capitalized improvements you've made over the years.
Usually if you sell a house, unless it is a large apartment, there will not be a purchase price allocation in the sales agreement. If there were, it would say something like 80% of purchase price to building, 10% to land, 10% to appliances - in which case you would know how to allocate it for recapture purposes. Without this allocation in the agreement, you may apply a reasonable allocation of sales price. So for example, if your carpet needs to be replaced, but you sold it without replacing it, you may choose to allocate $0 to your carpet "asset" that has been depreciated. As such, no recapture. If your appliances are still good, you may make a reasonable estimation as to their fair market value and allocate that amount for recapture purposes.
Make sure you document all this so if you are ever questioned you have your logic written down and don't have to recreate it.

Ugh. could you just do number of years divided by 27.5 for recapture, ie; 2 years equals 2/27.5 for recapture?

Apologies for hijacking the thread.
Nope, not even for the building, since depreciation is mid-month for residential rental property. Your first year in service depreciation is not 1/27.5 of the basis, nor is your last year a full year.

[robartsd]

Isn't this making recapture more complicated than it needs to be? Capital investments are cost basis when they are incurred. Cost basis is reduce by depreciation. You recapture losses when you sell above remaining cash basis. If you segregate at a sale, you can claim you sold some things at a loss and recaptured depreciation claimed on other things, but doesn't it just cancel out? Can't you just compute the current cost basis of all your investment into the property (sum purchase price and capital improvements and subtract the sum of the depreciation taken on those investments) then compare the sale price to compute earning/loss? I understand that segregating costs of large properties can allow different parts of the costs to be depreciated at different rates, but does it make a difference when the property is sold?

[CareCPA]

Isn't this making recapture more complicated than it needs to be? Capital investments are cost basis when they are incurred. Cost basis is reduce by depreciation. You recapture losses when you sell above remaining cash basis. If you segregate at a sale, you can claim you sold some things at a loss and recaptured depreciation claimed on other things, but doesn't it just cancel out? Can't you just compute the current cost basis of all your investment into the property (sum purchase price and capital improvements and subtract the sum of the depreciation taken on those investments) then compare the sale price to compute earning/loss? I understand that segregating costs of large properties can allow different parts of the costs to be depreciated at different rates, but does it make a difference when the property is sold?

You can if you can defend that position if questioned. You can report it any number of ways, I'm just telling you the "by the book" way. Different assets are different classes of property (1245 vs 1250 vs 1231), and gains may be treated differently depending on the type of property being sold. Real property and tangible property are not the same thing. Depreciation and gain/loss calcs are not as cut and dry as people tend to think, which is why I say if you aren't going to hire a qualified tax professional, you really need to understand how taxes work, which was the original question of the thread (way to bring it all back to the beginning, now I feel less terrible that it got so derailed).

[robartsd]

You can if you can defend that position if questioned. You can report it any number of ways, I'm just telling you the "by the book" way. Different assets are different classes of property (1245 vs 1250 vs 1231), and gains may be treated differently depending on the type of property being sold. Real property and tangible property are not the same thing. Depreciation and gain/loss calcs are not as cut and dry as people tend to think, which is why I say if you aren't going to hire a qualified tax professional, you really need to understand how taxes work, which was the original question of the thread (way to bring it all back to the beginning, now I feel less terrible that it got so derailed).

I see. You'd first need to determine that all of the gains/losses would be treated the same before you combined them as I described. If they can't, you'd need to segregate. I imagine that most gains on a rental property would be long-term capital gains, but there could be other gains mixed in.

[Laserjet3051]

I am as frugal as the next guy out there and insource as much as humanly possible, but after having done taxes myself for over 15 years, and having used both good and bad CPAs for tax preparation for an additional 10 years, I am convinced they are a good investment for me (as a small business owner). Not only has a good CPA saved me a lot of money in taxes by teaching me strategy, but I have the comfort of knowing he will be there in my corner advocating, and representing me in the event of an audit. Seems like good, inexpensive insurance to me even though I have read every word in the relevant original IRS documents pertaining to all of my tax-related events.

[Frugalman19]

Figuring out taxes for a rental property is not rocket science and does not require a CPA.  You can deduct all of the ordinary and necessary expenses you incurred during the year.  This includes taxes, interest, homeowner's fees, advertising, management fees, a once-a-year visit if out of town, legal/professional fees, and small repairs.

You can also claim depreciation as a deduction on the structure (but not the land)...1/27.5 per year.  For my rentals, I subtracted the tax valuation of the land from the purchase price to determine the tax basis.

You can also depreciate the capital improvements, but over a shorter time frame (5-, 7-, or 15-years).  This is like renovations, carpet, HVAC.

I use Turbotax to walk me through the calculations.  Never had any problems with the software and the IRS hasn't questioned anything.

How do you know you are doing it correctly? Pay for a CPA, you are almost guaranteed to save money in the long run. Just because you haven't been audited doesnt mean you arent doing your taxes incorrectly or paying too much in tax. My CPA's office does 2,800 returns a year, and they have not had an IRS audit on a client in 10 years. Not saying that they are perfect, just saying that the IRS is not reviewing peoples tax returns, so dont let that determine if youre doing it right.

But if you are an expert, which it seems you know a thing or two, then by all means give it a shot, but if you have any question or are uncomfortable like the OP is, go see a professional. I see so much wrong tax information on this forum, keep that in mind.

[Telecaster]

Does it seem like a good value in our situation to pay for a CPA? 

Yes. 

[Vagabond76]

How do you know you are doing it correctly?

Because I self studied the IRC, regulations, revenue rulings, and case law for years before going into real estate.  I am confident that I understand rules better than half the people at the IRS.

[Heroes821]

My CPA lives in Denver and he's been working with me since I moved to south Carolina and texas, so geo location is probably not such a big deal.

[Frugalman19]

How do you know you are doing it correctly?

Because I self studied the IRC, regulations, revenue rulings, and case law for years before going into real estate.  I am confident that I understand rules better than half the people at the IRS.

Im almost positive that is the case. You seem more than qualified to do your own taxes. I was just speaking in general for the OP, how would he know if he is doing it correctly? This forum is lousy for tax advice, yes you might get the correct answer from someone, but for every correct answer you get, there are 20 incorrect answers from people not nearly as knowledgeable in this as you are. Then who do you trust. Unless you spend the time like you have, I still think its a no brainer to go see a CPA/EA at least a few times and ask questions.