What Tax Questions Should I Discuss With My CPA Before Buying an Investment Property?
Buying an investment property can have tax implications that vary depending on the property, how you use it, and your individual financial situation. Talking with a qualified tax professional before you buy can help you understand what may apply to you.
When you're evaluating an investment property, it's natural to focus on the purchase price, financing, potential rental income, and ongoing expenses.
Taxes deserve a place in that conversation too.
Real estate agents can help you gather information about a property, but we're not tax professionals. A CPA or other qualified tax professional can help you understand how owning an investment property may affect your specific tax situation.
Having that conversation before you purchase can also help you know what records and information you'll want to keep once you become a property owner.
Quick Takeaways
Tax treatment can vary based on how a property is owned and used.
Rental income may have tax implications.
Certain property-related expenses may receive different tax treatment.
Selling an investment property can also have tax consequences.
Tax laws and individual circumstances can change.
A CPA or qualified tax professional should advise you about your specific situation.
How Will Rental Income Affect My Taxes?
If you plan to rent the property, one of the first questions to ask your CPA is how rental income should be reported and what records you'll need to maintain.
Consider asking:
How will my rental income be treated for tax purposes?
What income records should I keep?
Does it matter whether the property is a long-term or short-term rental?
Does personal use of the property affect how it is treated?
This is particularly important if you're considering a vacation property that you'll use personally and rent to others.
What Property Expenses Should I Keep Track Of?
Owning a rental property can involve a long list of expenses.
Ask your CPA what records you should maintain for things such as:
Repairs and maintenance.
Property management.
Insurance.
Association fees.
Utilities.
Professional services.
Furnishings or equipment.
Improvements to the property.
Other ownership and operating expenses.
Your CPA can explain how different expenses may be treated and what documentation you should keep.
What Should I Know About Depreciation?
You may hear the term depreciation when discussing rental property taxes.
Rather than trying to determine how it applies on your own, ask your CPA questions such as:
Does depreciation apply to this property?
How is it calculated?
When does it begin?
How could it affect my taxes while I own the property?
What happens to depreciation when I eventually sell?
Your tax professional can explain how the rules apply to your particular property and circumstances.
What Happens When I Eventually Sell?
It's easy to focus on buying the property and forget to ask what could happen years later when you sell it.
Before purchasing, consider asking your CPA:
What tax considerations could apply when I sell?
How could appreciation affect my taxes?
How could previous depreciation affect a future sale?
What records should I keep for improvements I make over the years?
Are there planning considerations I should understand now?
You don't need to know exactly when you'll sell to benefit from understanding the potential tax considerations ahead of time.
Does the Way I Own the Property Matter?
Some investors purchase property individually, while others explore different ownership structures.
The appropriate choice depends on circumstances that extend beyond the real estate transaction.
If you're considering an LLC or another ownership structure, talk with the appropriate tax and legal professionals before deciding how to take title to the property.
Your CPA and attorney can explain the potential tax and legal considerations of the different options.
What Should I Bring to My CPA?
If you've already identified a property, providing your CPA with some basic information may make the conversation more productive.
That could include:
Purchase price.
How you plan to use the property.
Whether you expect to rent it.
Estimated rental income, if available.
Known association fees.
Estimated insurance and property taxes.
Whether you're financing the purchase.
Any planned improvements.
Your CPA can tell you what additional information they need.
The Bottom Line
If you only remember one thing from this article, let it be this:
Don't wait until tax season after you've purchased an investment property to start asking tax questions.
Talking with a qualified tax professional before you buy can help you understand the potential tax considerations, know what records to keep, and make decisions with better information from the beginning.
From Dana & John
We can help you understand the real estate side of an investment-property purchase, but there are some questions where the best answer should come from another professional.
Taxes are one of those areas.
If tax considerations could affect your decision, we encourage you to talk with your CPA or qualified tax professional before you purchase. We'll gladly help provide the property information you need so you can have that conversation with the right information in front of you.
Continue Learning
Considering an investment property? These resources can help you look at the financial side from several different angles before you buy.
→ Is an Investment Property Right for Me?
→ How Do I Finance an Investment Property?
→ What Expenses Should I Budget for as a Rental Property Owner?
→ How Do I Estimate Cash Flow on an Investment Property?
Have Questions?
If you're considering an investment property along Alabama's Gulf Coast, we're happy to help you explore available properties, gather the real estate information you need, and work alongside the other professionals involved in your purchase.
Dana & John Martin – Team Martin
Waters Edge Realty
318-504-9925 | 504-450-2714
ALGulfCoastAgents@gmail.com
