By Roger Ledbetter, CPA. Updated September 2026.

Key takeaways

• Most red flags are silences. The IRS never sends a notice about a skipped election or a badly timed deduction, so nobody finds out.

• A CPA who never asks for your operating agreement is guessing at your K-1.

• Real estate owners lose the most on timing: when to take cost segregation, how the self-rental rule treats your building, and what a sale will cost.

• Each red flag below comes with one question to ask. A good CPA answers it in a sentence or two.

You own a building, an operating company, and a stake or two in someone else's deal, and you are either interviewing CPAs or starting to wonder whether the one you have does more than file the returns. Every firm says it does real estate. The difference shows up in what they ask you.

The IRS sends a notice when a return is late or wrong. Nobody sends one when a CPA skips an election or times a deduction badly. You pay more tax, the return is accurate, and you never find out. That is why most of the red flags below are things a CPA never brings up.

The list comes from the issues we cover in our real estate syndication tax guide. They apply just as much to a two-member LLC or an S-corp that owns its building.

Red flag 1: they never ask for your operating agreement

The operating agreement is the source document for your K-1. It decides who gets allocated income, who gets cash, and who can make elections. A CPA who prepares the return without reading it is working from assumptions.

Three clauses cause most of the trouble when they are missing or vague:

• Tax distributions. Without a mandatory clause, the partnership can allocate you $80,000 of taxable income in a year it distributes nothing, and you pay the tax from your own pocket on money still sitting in the deal's bank account.

• Allocations. If the profit and loss allocations drift from the cash waterfall, the K-1 won't match the deal you signed.

• Election authority. If the agreement doesn't say who decides, a dispute can stall an election that has a deadline.

S-corps have their own version. Distributions must follow ownership percentages. A shareholder agreement that allows uneven distributions can put the S election at risk.

A good CPA reads the agreement and tells you what to change. We mark it up before you sign, when a fix costs a phone call. After signing, the same fix can mean lawyers, amended returns, and partner consent you may not get. Our operating agreement checklist covers the clauses in more detail.

Ask: "Will you read our operating agreement and tell us what needs to change?"

Red flag 2: they never talk about when to do cost segregation

A cost segregation study moves parts of a building onto faster depreciation schedules. With 100% bonus depreciation, those parts can be deducted in the first year. On a $3 million building, that can mean $600,000 or more of deductions in year one.

The red flag is a CPA who treats the study as automatic. It isn't. The deduction only helps if you can use it. Before ordering a study, a good CPA checks three things:

• Whether the loss is passive, and whether you have passive income for it to offset.

• Whether you have enough basis in the entity to take the loss.

• When you plan to sell, because the faster depreciation comes back as recapture.

Timing is flexible. A study can be done in a later year, and the depreciation you skipped is caught up in full on that year's return without amending anything you already filed. So the real question is which year the deduction does the most good. A year you qualify as a real estate professional, or a year a large passive gain lands, can be worth far more than year one.

Ask: "If we do a cost segregation study, what year should we take it, and why?"

Red flag 3: they never mention the self-rental rule

Many owners hold their building in one LLC and rent it to their own operating company. That setup falls under the self-rental rule. Most owners have never heard of it, and their CPA never brought it up.

The rule treats the two directions differently. Rental profit from your own business counts as nonpassive income. Rental losses on the same building stay passive. Passive losses can't offset nonpassive income, so the building's early losses can't shelter its later rent.

Here is how that plays out. You buy a $2 million building and do a cost segregation study. The building LLC reports a $450,000 loss in year one. You have no other passive income, so the loss is suspended. From year two on, the building shows $90,000 of net rent a year, and because that rent is nonpassive under the self-rental rule, the suspended loss can't touch it, even though both numbers come from the same building. You pay tax on the rent every year while $450,000 of deductions wait for a sale.

There is often a fix. When you own the building and the business in the same percentages, you can elect to group them as one activity. The building then counts as part of a business you work in, and its losses can offset business income. The grouping is hard to undo, so decide it before the study.

Ask: "Does the self-rental rule apply to our building, and should we group it with the business?"

Red flag 4: they can't tell you your basis

Basis is your running investment in each partnership or S-corp. It goes up with contributions and income. It goes down with losses and distributions. It decides whether you can deduct a loss and whether a distribution is tax-free.

Ask a CPA for your basis in each entity. If the answer is "we'd have to look into that," nobody is tracking it.

The rules differ by entity type, and owners get caught in the gap. In a partnership, your share of the entity's debt counts toward basis. In an S-corp, it doesn't. A bank loan to your S-corp adds nothing to your basis, even if you personally guarantee it and would be the one writing the check if the business couldn't pay. Only money you lend the company directly counts.

The cost shows up fast. Say you take $150,000 of distributions from an S-corp and your stock basis is $90,000. The extra $60,000 is taxed as capital gain, in a year you thought you were only moving your own money.

Ask: "What is my basis in each entity right now?"

Red flag 5: they never ask how you pay yourself

How you take money out decides how it gets taxed. In an S-corp, owners who work in the business need a reasonable salary. If it's too low, the IRS can reclassify distributions as wages and add payroll tax, penalties, and interest. If it's too high, you pay payroll tax you didn't owe.

In a partnership, the choice is between guaranteed payments and distributions. A guaranteed payment is ordinary income and usually carries self-employment tax. A distribution is tax-free up to your basis. We run a $200,000 side-by-side in guaranteed payments vs. distributions.

Profit changes every year. A salary or payment schedule set three years ago and never revisited is a sign nobody is planning.

Ask: "Is the way I pay myself set for this year's profit, or for last year's?"

Red flag 6: they let you put real estate in an S-corp

An S-corp is a poor place to hold a building. Taking property out of an S-corp is treated as a sale at fair market value, even when no money changes hands and the building simply moves from the company to you or to a new LLC. A building with a $1 million tax basis that is now worth $2.5 million triggers $1.5 million of gain the day it comes out. S-corps also give owners no basis for the mortgage, and the building's inside basis doesn't step up when an owner dies.

An LLC taxed as a partnership avoids these problems. If a CPA suggests an S-corp for real estate, ask why. If you already hold property in one, getting it out takes planning, so start well before you want to sell.

Ask: "Why is this property in this entity, and what would it cost to move it?"

Red flag 7: they never talk about the sale

Depreciation lowers your tax while you own a building, and part of that benefit is repaid when you sell. At sale, prior depreciation comes back as recapture. Deductions from a cost segregation study are recaptured at ordinary rates, up to 37%. Depreciation on the building itself is taxed at up to 25%. Only the appreciation above what you paid gets long-term capital gain rates.

Suspended passive losses matter too. A fully taxable sale releases them against your other income. A 1031 exchange does not, so the losses stay suspended and move into the next property.

A good CPA models the sale before you list the property. Better still, they model it before you order a cost segregation study, because the study changes how much of your eventual gain gets taxed at ordinary rates instead of capital gain rates.

Ask: "What would my tax bill be if we sold this property next year?"

Red flag 8: you only hear from them between January and April

Tax season is for reporting what already happened. Every red flag above is a decision made the rest of the year. Cost segregation timing, the grouping election, salary levels, and an operating agreement markup all have to be decided while there is still time to act, which means somewhere between May and December.

This is not always the CPA's fault. Compliance and planning are two separate pieces of work, and many owners have only ever paid for the first. The conversation that produces planning ideas was never scheduled. One question tells you which kind of engagement you have.

Ask: "What happens in June?"

A CPA doing planning has an answer ready: a midyear projection, estimated payments reset to real numbers, and a short list of moves to make before December. If the answer is "we'll see you in January," the engagement covers compliance only.

The 8 red flags at a glance

FAQ

What are red flags when hiring a CPA? The standard ones still apply: no active license, no engagement letter, or a fee based on the size of your refund. For owners with real estate and several entities, the costlier red flags are silences. A CPA who never asks for your operating agreement, never discusses cost segregation timing, and can't state your basis will file an accurate return and you will still overpay.

How do you know if a CPA is good? Ask a specific question about your situation and listen for a specific answer. "What is my basis in each entity?" and "Does the self-rental rule apply to our building?" both have short, concrete answers. A good CPA gives one, or tells you exactly what they need to find it.

What is a real estate CPA? A CPA whose clients mostly own real estate, directly or through partnerships and LLCs. Their work goes past reporting rental income into depreciation timing, passive loss rules, basis across entities, and the tax cost of a sale. We cover more of this in what a real estate CPA catches that a generalist misses.

What can a CPA do that a regular accountant cannot? A CPA is licensed by the state, can represent you before the IRS in an audit or collection matter, and can sign audited financial statements. Enrolled agents and attorneys can also represent taxpayers before the IRS. Bookkeepers and unlicensed preparers generally cannot.

Is a CPA better than a tax preparer? For a W-2 and a mortgage, a preparer is often enough. Once you own rental property through an LLC, receive K-1s, or run an S-corp, the planning questions above start to matter. Those need a CPA who works with owners like you.

How do CPAs charge? Most firms price compliance per return, based on the number and complexity of entities. Some bill hourly. Planning is usually a separate engagement, scoped to your structure and the decisions coming up that year. Ask for the two to be quoted separately so you know what you are buying.

If you want to see how your setup holds up against this list, reach out. We also keep a library of more than seventy strategies, sorted by owner type, on our strategies page.

About Baldridge Ledbetter

Baldridge Ledbetter is a Houston CPA firm working with real estate investors, syndicators, and business owners who run multiple LLCs. We focus on real estate tax, multi-entity structure, and small business tax planning for pass-through owners. That is the work that decides what you keep, not just what you file. If you want a CPA who understands K-1s, cost segregation, and entity structure as well as you understand your own business, reach out.