Organizing the Real Estate Client

Real estate is important, valuable, and it isn’t going anywhere, so it tends to be highly regulated and much the focus of taxing authorities.

In organizing our real estate clients, we may initially think of listing the due date of the federal tax return, but there are myriad financial matters and taxes affecting our real estate clients.

The topic quickly proliferates into such matters as state and local compliance which is notoriously not uniform.

General Perspective

In helping the client understand the complications of their realty investments and how to better organize the work involved, a topic that soon surfaces is the level of the accountant’s participation.  What work is most efficiently done internally and how much should be the focus of the outside accountant?

A side benefit to organizing the realty client is that it tends to show where the accountant can help, which is to say it also tends to generate work for the accountant.

Worksheets with due dates, ID numbers, etc. can be designed to fit the client’s particular circumstances.  Our focus isn’t on particular software or tools.  Organizing the worksheet to help a particular realty client may be a bit of an organizational task in itself, but what we’ll discuss here can be done on spreadsheets.

For illustration purposes, we’ll generally assume a perspective of married couple in California with say fifty properties, and an occasional partner or small group of recurring investors.  Our organizational tips below may involve some redundancies.

It is not uncommon for the accountant to get very involved with their real estate clients, even to the point that they join in the ventures of their client, or vice versa.  The accountant may have the realty expertise and relationships such that clients may want to partner in the realty ventures of the accountant.  The legalities and related issues down that path are not our focus.  Our focus is the work generated and how best to organize it.


The choices are generally corporation, S corporation, partnership, LLC, or only direct ownership by either or both spouses (or their living trust).  Each of these may present its own organizational challenges.

Keep in mind that in community property states, both halves of realty step up to value at the date of death upon the death of the predeceasing spouse, so converting separate property (say inherited property) to community property is often  an issue for discussion, with its pluses and negatives (e.g., what if there is divorce?).  One of the up-front discussion issues is whether the current ownership structure is advisable.

In general, we see much use of the husband-wife LLC.  The proliferation of entities tends to enhance the limited liability aspects: e.g., eight properties in one LLC tends to put at risk many properties if there’s an uninsured accident, a law suit involving one property.  How whether to include one or two or many properties per LLC is generally a topic for discussion with the attorney and insurance professional.  The proliferation of entities tends to increase the work, tax reporting, and, e.g., in California, the $800 annual minimum tax on LLCs.

In a community property state, the couple may qualify to disregard the LLC.  ((Rev. Proc. 2002-69, 2002-2 CB 831.))  This has the advantage of simplicity but some also believe that proliferating the reporting of the entities makes it more work for the IRS and that this can have its advantages.

If the realty operation is a business, see also “Election for Married Couples Unincorporated Businesses,” discussion of the “qualified joint venture” concept.  ((  See also “Entities, Question : Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?

Organizational tips: Complete list of each entity, legal name and any DBA;  tax ID# obtained or application to be filed; estimated tax due dates – federal, state and local; return due dates – federal, state and local; location of tax returns – federal, state and local income reporting as well as, e.g., document fees relating to an LLC; location of acquisition documents, key points summarizing the acquisition documents, including basis information; listing by address of properties in each entity with legal description, date of acquisition; transfers of partnership interests or death of a partner should be documented if basis is affected as a result of Sections 734, 743, and 754.

Reporting to other investors will involve its own set of organizational issues.


To a surprising degree, the accountant may find properties “moving around” even among the entities controlled by the same taxpayer(s), which can have consequences in such areas as property taxes.  There should be a system in place to bring to the (internal or external) accountant’s attention new properties, properties disposed of by sale or like-kind exchange, or any transfer of properties among entities controlled by the taxpayer.  The procedures should, but often do not, involve first asking the accountant or other adviser whether there may be unexpected consequences to any restructuring.

Organizational tips: Listing by address of properties in each entity plus legal description, date of acquisition and any acquisition documents as well as any documents transferring the property to an entity; depreciation records from inception or location of tax returns with depreciation details; location of returns and sales/1031 documents regarding sale/transfer of a particular property.

Income Tax Files and General Accounting

It can be helpful to have an “income tax trail” of where each property’s income is reported, whether Form 1040, partnership return, trusts, estates, etc., with notations of the years and a notation of the date of acquisition and any transfers by sale, exchange or gift.

Realty clients may think they remember all the details, and we’re often surprised at how much information realty clients carry around in the heads (the topic is wrought with details), but there’s advantages to summarizing the client’s realty income in a way that is both uniform and simplifying.

A uniform chart of accounts for all properties is recommended, although one of the challenges is being meaningful amidst disparate circumstances; e.g., summarizing commercial and residential properties side-by-side in a helpful way.  Generally useful is a columnar spreadsheet with properties at the top and perhaps summarizing columns by entity (e.g., when there are various properties in one partnership), and a column summarizing the percentage ownership in the particular properties, as well as total income and expense.

Our focus here is internal usefulness so despite all the GAAP accounting issues that could be addressed, we note that often the most useful and practical is a just-tax-figures worksheet.  It can be useful for tax planning purposes but our main focus is helping the client understand in a timely and recurring manner how they are doing, with details as well as totals.  Comparable figures, changes, percentages, etc. are part of the design aspects.  There is no one-size-fits all solution here.  The client generally has to participate and share what is most useful to their understanding.

Organizational tips: Location of tax records by year (returns and support), location of accounting records and worksheet files by year, cost segregation studies (what’s realty and what’s not and costs allocated to different depreciation categories), loan files from inception by property, including amortization schedules and yearly reports by lenders to client and IRS; location of insurance documents, statute of limitations files – federal, state and local; location of examination files – federal, state and local; information needed in the event of death or incapacity - names and contact information of attorney, CPA, insurance agent, personal banker, successor owners; location of will, living trust, powers of attorney, special instructions.

Car and travel logs are important if the client is hands-on because the nature of the work in inherently one of multiple locations.

Time records and other documentation necessary to refute passive loss issues are particularly important even for realty clients who are conspicuously active.

Payroll Taxes

The realty industry is known for problems in this area.  IRS challenges as to who is an employee vs. independent contractor are common.

We’ve known taxing authorities at work sites asking people who they work for.  One successful tax engagement of the author was responding to such query where the worker said falsely that he was employed by my client, who was actually the owner-investor, who did have one employee frequently at the site looking after the work progress, but the construction workers were independent or otherwise employed.  The result was an employment tax audit that looked into numerous entities of my client but with no adjustments.  The taxing authorities in employment tax audits do tend to cover many if not all the entities controlled by the same parties if an audit gets started, and it may get started by one construction site worker making a false statement.

Organizational tips: Location of payroll tax files and correspondence by year, location of time reports, etc.; statute of limitations files may be helpful but this aspect is rarely tracked.

Property Taxes

Property tax work is surprisingly complicated.  There are issues at inception and on-going; e.g., cost allocations and issues as to what is an improvement that may or may not increase the property tax valuation.  There are technical tax issues.  For example, in Los Angeles, it is possible for spousal transfers to trigger reassessment if, say, there is a transfer from one LLC to another and the spouses have disparate ownership.  There are issues that arise as an owner passes or there are changes in ownership of the entity.  The rules here often look to the percentage of ownership change.

In general, allocating some resources to disputing what the property tax assessor comes up with is worth the fee to the client.

Organizational tips: Location of tax files by property by year (paperwork volume in property tax area is surprisingly large); tracking ownership, including entity ownership and changes that may require reporting to the property tax authorities; statute of limitations files may be helpful but this aspect is rarely tracked.

In general, one also needs to organize files of the literature and reference sources pertaining to this complicated topic.


In general, one needs to understand the rules that affect the particular client.  For example, a client owning a property in the next county may trigger reporting unique to that county.  The reporting may involve the property, or the entity that owns the property.  There may be unique organizational efforts needed in such areas as business license taxes.

As indicated, there may be reporting that is unique to the particular entity structure.  For example, LLCs where the husband-wife have community property ownership may elect to report a property directly on their Form 1040 which may simplify their income tax reporting, but such election may still involve California LLC reporting.


The accountant or other adviser should expect to walk into a complicated environment if the client has more than a few properties.

Work with our realty clients tends to be satisfying because there are often conspicuous tax savings and organizational improvements possible.

J. Michael PuseyAbout the Author

J. Michael Pusey, CPA, MSA, is a National Tax Director with Rojas and Associates, CPAs, Los Angeles.  He has over forty years experience in tax and finance.  Mr. Pusey has written or contributed to four tax books, including an AICPA Tax Study, and a finance book.  Mr. Pusey began his career with KPMG before working nine years in “national tax” for Laventhol & Horwath and Grant Thornton. He was V.P., Assistant Tax Director, Manager of Research and Planning for a NYSE financial institution prior to beginning his practice, then joining Rojas and Associates.

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