Do you want to pay the least amount of tax legally?
Do you want to minimize how much you pay for tax preparation?
Do you want to reduce your audit risk?
If you answered yes to any of these questions, your first step is to build your team.
Your team has a direct impact on how much you pay in tax, how much you pay for tax preparation and reducing your audit risk.
Who do you need on your team?
Your tax advisor and bookkeeper are key members of your team when it comes to your tax strategy.
Who else do you need on your team?
Think about the types of investments you have, this will help you identify who else you need on your team.
If you own rental real estate, your property manager has a huge impact on your tax return.
If you have a stock portfolio, either in your name or your company name, you need a stockbroker on your team.
Here’s how your property manager impacts your tax return:
I have seen thousands of property management reports; many of them cannot be used to report rental real estate activity on a tax return because the basis of reporting is inconsistent with the tax return basis of reporting.
Most reports from a property manager report on a pure cash basis meaning the report they provide is a cash flow statement (not a balance sheet and income statement). For normal expenses, this is just fine. For assets, like a new roof or a new shower, cash basis reporting will not work on your tax return. Assets must be depreciated. This means the type of asset, purchase price and date of purchase are needed to accurately report the asset on your tax return.
I have seen property management reports that simply lump assets in with repairs. This is bad. There are two possible outcomes on your tax return: (1) The information is used as is, which leads to inaccurate reporting on your tax return (and a large repair number may draw scrutiny from the authorities) or (2) your tax preparer has to decipher what is really in that repair item which adds extra fees to your tax return preparation.
Here’s the good news. You don’t have to have your property manager completely change their reporting. Your property manager simply needs to understand how their reporting impacts your tax return.
The solution is to have your property manager show assets as a separate line item (not lumped in with repairs). Then, have your property manager run a detail report for those asset line items – it will show all the details needed to accurately report it on your tax return.
Here’s how your stockbroker impacts your tax return:
When stock is sold, it is reported to the authorities and the authorities then look to match it to your tax return. This makes the reporting from your stockbroker very important – records that do not match will draw questions from the authorities.
A common “black hole” I see with stock and tax returns is basis. It is absolutely critical your stockbroker provides basis reports for the stock you have sold. If your tax preparer is left to do this, it will no doubt add to your tax return fees (considerably) and probably will not be as accurate if your stockbroker tracked it all along.
Build Your Team Now
I’ve seen the inner workings of thousands of wealth and tax strategies. The most successful ones always have a team of advisors behind it.