.png)
You've built a solid real estate portfolio, three rental properties generating $180,000 in annual income. Come tax season, you're hit with a $55,000 tax bill. Meanwhile, an investor friend with a similar portfolio paid just $12,000. The difference? They work with a CPA who specializes in real estate.
A real estate CPA identifies tax strategies most generalists miss, from accelerating depreciation deductions to structuring 1031 exchanges. These specialized accountants understand IRS regulations specific to property investment and can legally reduce your tax liability by 40% or more. This guide breaks down exactly what real estate CPAs do, which services deliver the biggest returns, and how to find the right specialist for your portfolio in 2025.
A CPA specializing in real estate provides tax planning, compliance services, and financial strategy specifically for property investors, developers, and real estate professionals. Unlike general accountants, these CPAs focus exclusively on real estate tax code, a specialized area that spans over 15,000 pages of IRS regulations.
Real estate CPAs handle depreciation schedules across multiple property types, manage cost segregation studies that can generate $30,000 to $80,000 in first-year deductions per million dollars of property value, and structure transactions to defer capital gains taxes indefinitely. They prepare Schedule E forms for rental income, calculate passive activity loss limitations, and advise on real estate professional status, a tax designation that allows you to offset W-2 income with rental losses.
These specialists also perform entity structuring analysis. They evaluate whether you should hold properties in an LLC, S corporation, or partnership based on your liability exposure and tax situation. For investors managing multiple properties across state lines, real estate CPAs coordinate multi-state tax compliance and help you understand your obligations in each jurisdiction. When the IRS sends an audit notice, they represent you in meetings and provide the detailed documentation needed to support your deductions.
Cost segregation is an engineering-based tax strategy that breaks down building components into shorter depreciation periods. Instead of depreciating an entire commercial building over 39 years or residential property over 27.5 years, this approach identifies elements that qualify for 5, 7, or 15-year depreciation schedules.
Here's a concrete example. You purchase an office building for $1 million. After allocating $200,000 to land (which isn't depreciable), you have an $800,000 depreciable basis. Under standard depreciation, you'd write off roughly $20,500 annually. With a cost segregation study, your CPA's engineering team identifies $300,000 in qualifying components, carpeting, electrical systems, HVAC units, parking lot improvements, and interior fixtures.
Thanks to the One Big Beautiful Bill Act signed in 2025, properties placed in service after January 19, 2025, qualify for 100% bonus depreciation on these components. That $300,000 gets written off immediately in year one, not spread over decades. At a 37% federal tax rate, this generates $111,000 in tax savings, $90,500 more than standard depreciation would provide.
The strategy becomes even more powerful when you factor in the catch-up provision. If you purchased property in 2023 or 2024 and didn't perform a cost segregation study, you can still complete one in 2025. By filing IRS Form 3115, you claim all the missed depreciation from previous years as a single deduction on your current return. One investor we studied recovered $470,000 in accelerated depreciation this way, reducing their tax bill by $162,500, a 26x return on their $6,100 study cost.
Real estate CPAs coordinate these studies with qualified engineering firms to ensure IRS compliance. They integrate the results into your overall tax strategy and help you understand when cost segregation makes sense, typically for properties with a basis above $500,000 that you plan to hold long-term.
A 1031 exchange allows you to sell investment property and reinvest the proceeds in new property while deferring capital gains taxes. This isn't just about saving money today, it's a wealth-building tool that lets you continuously upgrade your portfolio without losing 20% to 37% of your equity to taxes.
The mechanics are strict. You have 45 days from your property sale to identify replacement properties, and 180 days total to close on the new purchase. Miss either deadline by even one day, and the entire transaction becomes taxable. You can't receive sale proceeds directly, funds must flow through a qualified intermediary. The replacement property must have equal or greater value, and you must reinvest all proceeds to defer 100% of the gain.
Real estate CPAs guide you through these requirements and identify opportunities most investors miss. They calculate boot, any cash or debt relief you receive that becomes immediately taxable. They structure partial 1031 exchanges when you want to pull some cash out while deferring the rest. For investors building wealth across generations, CPAs explain how to combine 1031 exchanges with estate planning to potentially eliminate capital gains taxes entirely through stepped-up basis at death.
One investor sold a $2.4 million rental property with a $1.8 million gain. Without a 1031 exchange, federal and state taxes would have consumed $540,000. Their real estate CPA structured a 1031 exchange into a higher-cash-flowing property, preserving the entire $2.4 million for reinvestment. Over the following decade, that preserved capital generated an additional $720,000 in rental income that would have been lost to taxes.
For complex transactions involving multiple properties or partnerships, CPAs help with strategies like reverse 1031 exchanges (where you acquire the replacement property before selling the relinquished property) and improvement exchanges (where you use exchange funds to improve the replacement property).
How you hold real estate directly impacts your liability exposure and tax burden. Most investors start as sole proprietors because it's simple, but simple isn't always best. A real estate CPA evaluates whether restructuring could save you thousands annually while protecting your personal assets.
LLCs provide liability protection without the complexity of corporate tax filing. When you own rental property in an LLC, tenants can't go after your personal assets if they sue. For tax purposes, single-member LLCs are disregarded entities, you still report rental income on Schedule E of your personal return. Multi-member LLCs file as partnerships, which splits income among members and can help manage passive activity loss limitations.
S corporations become valuable once your rental income exceeds $75,000 annually. By electing S corp status, you pay yourself a reasonable salary (subject to payroll taxes) and take remaining profits as distributions (which avoid the 15.3% self-employment tax). For an investor earning $150,000 from property management activities, this structure typically saves $15,000 to $22,000 annually. The <a href="https://madrasaccountancy.com/blog-posts/c-corps-vs-s-corps-key-differences-and-how-to-choose-for-your-business">key differences between C corps and S corps</a> become critical when you're scaling a real estate business with multiple income streams.
C corporations rarely make sense for rental properties because of double taxation, the corporation pays tax on profits, then you pay tax again on dividends. However, C corps can work for real estate development businesses that need to retain earnings for future projects.
Your CPA considers your liability exposure, income level, number of properties, and long-term plans. If you're acquiring properties across multiple states, they might recommend a series LLC structure, one parent LLC with separate series for each property, limiting cross-liability. For investors concerned about estate planning, CPAs help structure family limited partnerships that facilitate wealth transfer while maintaining control.
If you're a W-2 employee with $200,000 in salary and $150,000 in rental real estate, standard passive activity loss rules prevent you from using rental losses to offset your wage income. Real estate professional status changes this, potentially saving high earners $50,000 or more annually.
To qualify, you must spend more than 750 hours per year in real estate activities and more than half your working time in real estate. The IRS defines real estate activities broadly: property management, renovation work, tenant screening, marketing rentals, showing properties, and administrative tasks all count. You must also materially participate in each rental property, typically meaning 100+ hours per property annually or using a valid exception like the "500-hour safe harbor" for grouped properties.
A physician earning $400,000 annually purchased four rental properties generating $120,000 in income. After depreciation and expenses, she showed a $60,000 paper loss. Without real estate professional status, this loss was trapped, usable only against future passive income. By documenting 850 hours of real estate activity (property showings, renovation oversight, tenant management), she qualified as a real estate professional. That $60,000 loss offset her medical income, saving $22,200 in federal taxes alone.
Your real estate CPA helps document qualifying hours through detailed activity logs, establishes material participation for each property, and ensures you meet both the 750-hour test and the more-than-half test. They also advise on grouping elections, a strategic choice to treat multiple properties as one activity, making material participation easier to prove.
For married couples, only one spouse needs to qualify as a real estate professional. CPAs help structure arrangements where one spouse focuses on real estate while the other maintains outside employment, maximizing both tax benefits and income security.
Purchasing rental property in another state creates tax filing obligations in that jurisdiction, and the compliance requirements vary dramatically. A real estate CPA with multi-state expertise ensures you don't overpay or face penalties for missed filings.
Some states use sourcing rules where rental income is taxed in the property's location, not your residence. Others require composite tax returns for LLC members. Several states have withholding requirements on real estate sales, meaning they keep a percentage of your proceeds until you file a return proving your actual tax obligation. California, for instance, withholds 3.33% of the sales price, which can tie up substantial capital for months.
When you own property across state lines, you need to understand each state's depreciation rules (some decouple from federal depreciation schedules), property tax deduction limitations, and whether the state recognizes 1031 exchanges for state tax purposes. New York and California have particularly complex rules around non-resident taxation. Some states don't allow you to deduct property management fees the same way others do.
Your CPA coordinates estimated tax payments across multiple jurisdictions, files non-resident state returns, and claims credits on your home state return for taxes paid to other states, preventing double taxation. For investors with properties in five or more states, this complexity alone justifies specialized help. One investor with properties in eight states was filing incorrectly and overpaying by $18,000 annually before their real estate CPA corrected the situation.
Real estate tax returns have higher audit rates than standard W-2 returns because they involve complex deductions, depreciation schedules, and opportunities for misreporting. <a href="https://madrasaccountancy.com/blog-posts/how-to-prepare-tax-audit">Preparing for a potential tax audit</a> starts with proper documentation from day one.
The IRS focuses on several red flags. Large losses claimed year after year without demonstrating material participation trigger scrutiny. Substantial home office deductions for rental property management can raise questions. Claiming 100% business use of vehicles or failing to properly distinguish between repairs (immediately deductible) and improvements (must be depreciated) invites examination.
Cost segregation studies, while completely legal and IRS-approved, must be defensible. The IRS expects engineering-level documentation, photographs, blueprints, component-by-component analysis, and qualified personnel signatures. Template studies without property-specific details don't hold up under audit.
When you receive an IRS audit notice, your real estate CPA represents you in meetings, prepares response packages with supporting documentation, and handles correspondence. They understand which deductions the IRS typically challenges and how to present evidence effectively. For investors who've done cost segregation studies, CPAs ensure you have the three-year audit defense documentation most reputable firms provide.
Proper audit protection starts before you file. Your CPA maintains contemporaneous records, documents each transaction with contracts and receipts, separates personal and business expenses completely, and ensures every depreciation schedule has supporting calculations. They also help you understand the statute of limitations, typically three years, but six years if the IRS suspects you underreported income by 25% or more, and unlimited if they suspect fraud.
Once your portfolio exceeds 10 properties or $2 million in value, you need more than tax compliance, you need strategic financial guidance. Many real estate CPAs offer <a href="https://madrasaccountancy.com/blog-posts/fractional-cfo-services-the-complete-guide-for-growing-businesses-in-2025">fractional CFO services</a> specifically for property investors.
A fractional CFO analyzes your portfolio performance property by property, identifying which assets underperform and should be sold versus which justify additional investment. They build cash flow forecasting models that show you exactly when to acquire properties, when to hold for appreciation, and when market conditions favor selling. For investors using bank financing, CFOs prepare the financial packages lenders require and help you present deals in ways that maximize approval odds.
These services become particularly valuable when you're considering major decisions. Should you refinance to pull equity out for new acquisitions? Does a particular property justify a $200,000 renovation, or should you 1031 exchange into a better asset? Your fractional CFO runs scenarios with actual numbers from your portfolio, showing projected returns and tax implications for each option.
For real estate businesses with employees, property managers, maintenance staff, leasing agents, fractional CFOs handle payroll structuring to minimize employer tax obligations. They implement internal controls to prevent embezzlement, a risk that increases as portfolios grow. One investor with 15 properties discovered their property manager had been inflating maintenance invoices by $3,200 monthly, $38,400 annually. Proper financial controls caught the fraud within two months.
Timing matters. The earlier you bring in specialized help, the more tax savings you'll capture. If you're buying your first rental property, consult a real estate CPA before closing. They'll advise on how to hold title, whether to establish an LLC, and which closing costs are immediately deductible versus those that must be added to basis.
For investors with two or more properties generating $75,000+ in annual rental income, specialized help typically pays for itself within the first year. The combination of proper entity structuring, optimized depreciation schedules, and strategic planning usually saves 3-5 times what you pay in CPA fees.
You definitely need a real estate CPA if you're considering selling property (1031 exchange planning should start six months before listing), purchasing commercial real estate over $1 million (cost segregation studies become highly valuable), expanding across state lines, or trying to qualify for real estate professional status. If you've received an IRS audit notice or if your current accountant doesn't specialize in real estate, making the switch can prevent costly mistakes.
The cost varies based on complexity. Expect to pay $2,000 to $5,000 for annual tax return preparation with basic planning for a small portfolio. Cost segregation studies run $4,000 to $12,000 depending on property complexity and value. Fractional CFO services typically range from $1,500 to $5,000 monthly. Many CPAs offer package pricing that bundles services, potentially reducing your effective hourly rate.
Before hiring, ask specific questions. How many real estate clients do they serve? Can they provide references from investors with portfolios similar to yours? Do they have relationships with cost segregation engineers and qualified intermediaries for 1031 exchanges? <a href="https://madrasaccountancy.com/blog-posts/how-to-find-a-good-cpa-in-2025-tips-and-what-to-ask-guide">Finding a good CPA</a> requires vetting their real estate expertise, not just their general accounting credentials.
How much can a real estate CPA save me in taxes?
Most real estate investors save $15,000 to $100,000 annually by working with a specialized CPA, depending on portfolio size and complexity. Cost segregation studies alone generate average first-year savings of $30,000 to $80,000 per million dollars in property value. Entity structuring can save another $10,000 to $20,000 annually for investors earning $100,000+ from rentals. The savings accumulate over time, one investor reported $470,000 in additional deductions over three years from a single cost segregation study.
What's the difference between a regular accountant and a real estate CPA?
A CPA holds a higher professional designation requiring state licensing, continuing education, and the ability to represent clients before the IRS. Regular accountants can't sign audited financial statements or represent you in an IRS audit. More importantly, <a href="https://madrasaccountancy.com/blog-posts/cpa-vs-tax-preparer-whats-the-difference-between-a-cpa-tax-professional">CPAs who specialize in real estate</a> understand the 15,000+ pages of IRS code specific to property investment, while general accountants typically don't focus on these niche strategies.
Can I do cost segregation on a property I bought two years ago?
Yes, through a lookback study. File IRS Form 3115 to claim all missed depreciation from previous years in a single current-year deduction, without amending prior returns. This catch-up provision means you're not penalized for waiting. However, you can't perform cost segregation in the same year you sell the property, it must be done while you still own it.
How do I qualify for real estate professional status?
You must spend more than 750 hours annually in real estate activities and more than half your working time in real estate trades or businesses. Material participation in each rental is also required, typically 100+ hours per property. Your real estate CPA helps document qualifying hours through detailed activity logs and establishes which activities count toward the 750-hour threshold. For married couples filing jointly, only one spouse needs to meet these tests.
Should I hold rental property in an LLC or my personal name?
LLCs provide liability protection, tenants and contractors can't pursue your personal assets if they sue. For tax purposes, single-member LLCs are typically disregarded entities (no separate tax return needed), while multi-member LLCs file as partnerships. Once rental income exceeds $75,000 annually, your CPA might recommend S corporation election to reduce self-employment taxes. The right structure depends on your liability exposure, income level, and long-term plans.
What documents do I need to bring to a real estate CPA?
Bring purchase closing statements, mortgage interest statements (Form 1098), property tax bills, rental income records, receipts for all repairs and improvements, depreciation schedules from previous years, entity formation documents (LLC operating agreements, partnership agreements), and any prior cost segregation studies. For 1031 exchanges, include sale closing statements and exchange documentation. The more organized your records, the more time your CPA can spend on strategy rather than document gathering.
How often should I meet with my real estate CPA?
Schedule quarterly meetings for portfolios exceeding five properties or $500,000 in value. These sessions review year-to-date performance, adjust estimated tax payments, discuss potential acquisitions or sales, and ensure you're maximizing current-year deductions. Annual meetings work for smaller portfolios, but connect before making major decisions, selling property, buying across state lines, or considering entity restructuring. Many investors also schedule mid-year tax projections to avoid surprises in April.
Does Madras Accountancy work with real estate investors?
Yes. As an international accounting and management consulting firm serving U.S. clients since 2015, Madras Accountancy provides specialized real estate accounting services including tax planning, cost segregation coordination, 1031 exchange guidance, multi-state compliance, and fractional CFO services. Our team works directly with real estate investors, developers, and property management companies to implement tax strategies that reduce liability and increase cash flow.
A CPA specializing in real estate brings expertise worth far more than their fee, typically generating 10-30 times ROI through strategic tax planning, proper entity structuring, and advanced strategies like cost segregation and 1031 exchanges. Start by evaluating your current tax situation. If you're paying significant taxes on rental income without maximizing depreciation strategies, you're leaving money on the table.
Your next step: Schedule consultations with two or three real estate CPAs. Ask about their client portfolio size, their experience with cost segregation and 1031 exchanges, and request references from investors with situations similar to yours. A 30-minute conversation will quickly reveal whether they understand real estate tax code at the depth you need.
At Madras Accountancy, we've worked with real estate investors since 2015, helping them navigate complex tax situations while reducing their effective tax rates by 30-40% on average. Whether you're acquiring your first rental property or managing a multi-million dollar portfolio, our specialized team can identify opportunities most generalists miss. Ready to see what you might be missing? Connect with our real estate CPA team to discuss your specific situation.
.png)
November 12, 2025
Plan your exit with real estate modeling strategies. Maximize returns using 7 proven methods for property disposition.
.png)
November 12, 2025
Compare CPA retainer plans for real estate investors. Get year-round tax planning and save thousands in 2025.
