ForeclosuresMass - ForeclosuresMass Monthly - Interview With The Expert - Three biggest tax-related mistakes (April 2006)

With April 15th just days away, there's little that can be done at this point to change the reality of your 2005 tax return. That said, you can still have a substantial impact on your 2006 return. With that in mind, we caught up with CPA Dolly Di Pesa, Managing Partner of Quincy-based DiPesa & Company CPA's, and posed the following question:

"What are the three biggest tax-related mistakes made by inexperienced real estate investors?" As you might imagine, she had quite a bit to say on the topic. Read on for more...

Dolly Di Pesa: The first mistake we see is waiting until February or March to get in touch with a tax professional for the previous year's return. Although tax returns are due to the IRS in the spring, the tax related events and decisions that make up a given taxpayer's return occur over the entire course of the year. Many first time investors - who still think of tax season as a one time event - fail to consult a professional as they make important decisions.

* Next 37 17 investors only!

DD: Well, let's say you purchase a property in April. Chances are you'll have expenses and other qualified deductions associated with that property in that same year. If you still have a full time job however, and you make no withholding adjustments to your W-2 after purchasing the property, it's likely that too much tax is now coming out of your paycheck. If you're in touch with a tax professional during the purchase, he or she will probably suggest a correction, and in the process, free up cash that you can use now - instead of next year when your refund comes back.

DD: Mistake number two is not working with a tax professional at all. Here too, many people who have never been in business for themselves simply assume that they can handle the tax filings for their investment properties as easily as they do for their personal finances.

FM: Why is that a problem - particularly if I'm comfortable doing my personal return now?

DD: Because once you're "in business" there are many more moving parts - decisions to be made, options to consider, actions to be taken. It may be fine to use one of those do-it-yourself software packages when you own one home and collect one paycheck, but things get vastly more complicated when you buy and sell real estate.

For example, something as seemingly straightforward as determining the correct "cost basis" of a purchased property will in fact have many layers - it's a lot more involved than just what you paid for the property. You'll need to take into account lawyers fees, closings costs, interest paid on loans to finance improvement costs, to name just a few. The land value itself (separate from the structure) has to be broken out and treated differently since land can not be depreciated. There's a lot to it, and if you go it on your own, you're likely to miss opportunities for savings and make mistakes.

There's also a misperception among inexperienced investors that taxes are black and white. The truth is, you could probably take your information to three different - equally qualified - tax professionals and get three different returns. The information would be materially the same, but your risk tolerance, financial situation and philosophy regarding taxes should all play into the final product. When you work with a qualified professional, you have a much better chance of filing a return that's both technically and personally accurate.

DD: The third is not viewing real estate investment with the proper long term perspective. Investing in real estate can be a terrific way to increase your personal wealth over time, however in the short term, lots of things can happen.

The market can take a downturn, preventing you from selling when you had planned; a tenant can unexpectedly move out, requiring you to make up the difference to meet the mortgage payment; the furnace can die in the middle of the winter, forcing you to invest in a new one. You need enough back up cash flow to "run the property" on a day to day basis, so that you can stay in the game until the day comes when you sell - hopefully with a nice profit.

FM: Thank you, and in particular for spending time with us during your busiest time of year.

Dolly Di Pesa is the Managing Partner of Di Pesa & Company, CPA's in Quincy, Massachusetts. The firm, established in 1923 by Ms. Di Pesa's grandfather, services many industries providing auditing, tax and management advisory services and is the largest woman-owned CPA firm in Greater Boston. Contact Ms. Di Pesa at DDiPesa@DiPesaCPA.com. For additional information view the website at www.DiPesaCPA.com.