The Costly CPA Mistakes We See And How to Avoid Them

When real estate investors come to us from other firms, it’s often because something doesn’t feel right. And more often than not, they’re correct. Somewhere in their tax filings, key opportunities were missed or compliance errors were made.

In this episode of the Tax Smart REI Podcast, Thomas Castelli, Justin Shore, and Ryan Carriere break down some of the most common (and painful) mistakes we see from other CPAs and how you can avoid them.

Electing Out of Bonus Depreciation Without Knowing It

One of the most surprising mistakes? Tax preparers are electing out of bonus depreciation without informing their clients. This election is irrevocable and can mean missing out on tens (or hundreds) of thousands in tax savings.

We’ve seen clients miss $25K, $50K, even $75K in deductions because a box was checked incorrectly or because the CPA didn’t understand cost segregation opportunities. The worst part? There’s often no way to fix it.

Takeaway: Always ask your CPA if bonus depreciation was taken and, if not, why.

Capitalizing Repairs That Should Be Expensed

Under the tangible property regulations, many repairs qualify for immediate deduction under the de minimis safe harbor. Yet we’ve seen minor repairs, $500 or $1,000 capitalized and depreciated over 27.5 years.

Conversely, some preparers expense major improvements that should have been capitalized, putting clients at risk in an audit.

Takeaway: Request your depreciation detail report every year. If something doesn’t look right, ask questions.

Grouping Syndication Interests for Real Estate Professionals

If you qualify as a real estate professional, grouping multiple rental activities (including syndications) can help meet the material participation test. But some preparers only group direct rentals and overlook syndications.

We helped one client recapture over $150K in passive losses by catching this exact oversight right before their return was filed.

Takeaway: If you’re a REP and invest in syndications, confirm whether they’ve been grouped for material participation.

Misusing the Augusta Rule

The Augusta Rule allows you to rent out your primary residence for 14 days or fewer per year and exclude the income. While this can be leveraged by renting your home to your S-Corp, it must be legitimate.

We’ve seen CPAs apply this without any actual meetings or business use, and with inflated rental rates, creating audit risk for clients.

Takeaway: Don’t fabricate deductions. Document every use, set a market rate, and treat your business like a business.

Running Personal Expenses Through a Business

One extreme case involved a client whose prior preparer ran personal expenses through a corporation under the guise of “medical specialist” strategies. They were unaware of extra entities and inflated losses, resulting in over $100K of risk per year, plus potential penalties.

Takeaway: If something sounds too good to be true, it might be. Ask for the code section or IRS guidance that supports any aggressive strategy.

Other Common Mistakes

• Not applying the short-term rental strategy even when the client clearly qualified, costing over $10K in missed deductions.
• Missing the home office deduction for a sophisticated investor.
• Double-dipping deductions like the self-employed health insurance deduction, costing $20K annually.
• Not optimizing the QBI deduction, leaving $60K+ on the table.

The Bottom Line

Mistakes like these aren’t rare. We see them all the time. And while some can be corrected, others are permanent.

The cheapest tax prep option often ends up being the most expensive. Working with a CPA who doesn’t specialize in real estate can lead to costly oversights, audit exposure, and missed opportunities.

If you’re a real estate investor, make sure you’re working with a tax advisor who truly understands your business.

Want to avoid these pitfalls? Book a discovery call with our team.

Transcript

Intro & Episode Preview

Thomas Castelli [00:00]

Thanks for tuning into this week’s episode of the Tax Smart REI Podcast. Today, we’re joined by Justin Shore, Advisory Manager on our team, to talk about common mistakes we see from other CPAs when clients come to work with us. Some of these mistakes are small—others are painful and costly. We’ll also take questions from the Tax Smart Insiders Facebook group.

Mistake #1: Electing Out of Bonus Depreciation

Justin Shore [01:15]
One of the most damaging errors we see is preparers electing out of bonus depreciation without informing the client. It’s an irrevocable election and can mean missing out on tens of thousands in deductions. This often stems from tax software prompts or unchecked boxes, but the impact is significant.

Thomas Castelli
Electing out can be strategic, but not when it’s done by mistake and without client awareness.

Ryan Carriere
I’ve had clients lose $25K to $75K in tax savings due to this. And because it’s irrevocable, we can’t fix it with a 3115 or amended return. Huge loss.

Mistake #2: Improper Treatment of Repairs

Justin Shore [07:01]
Another frequent error is capitalizing small repairs—like $500 fixes—when they should be expensed under de minimis safe harbor. That’s a deduction lost to 27.5 years of slow depreciation.
Always ask for your depreciation detail pages. Many preparers don’t provide them, and that’s how these errors stay hidden.

Ryan Carriere
It happens in reverse, too. Some write off what should be capitalized—like large renovations before a property is placed in service. That can flag audits.

Thomas Castelli
Misreporting either way—under-claiming or over-claiming deductions—puts you at risk.

Mistake #3: Grouping Syndications with Rentals Incorrectly

Thomas Castelli [14:51]
Another area of confusion is grouping fund and syndication interests when you’re a real estate professional.

Justin Shore
Grouping under Reg. 1.469-9 allows you to meet material participation by aggregating rentals and even syndications—if done correctly. One client had hundreds of thousands in suspended passive losses from syndications because their CPA didn’t realize you could group those. We caught it just in time and saved them $150K that year alone.

Mistake #4: Abusing the Augusta Rule

Justin Shore [27:29]
The Augusta Rule is legitimate—but it’s often abused. Renting your home to your S-Corp requires real, documented use. You can’t just claim 14 days at $1,500/day without proof.
Using your home for board meetings? That only works if you have a real board and meeting documentation. Most people don’t. If the IRS audits and you can’t substantiate the use, those deductions vanish—and penalties may follow.

Mistake #5: Running Personal Expenses Through a Business

Justin Shore [36:39]
One client came from a “medical tax specialist” who ran personal expenses through a corporation to offset income. They didn’t even know about some of the entities on their return.

When we reviewed everything, there were over $100K in inappropriate deductions—plus potential penalties of $50K to $90K per year for substantial understatements. It’s critical to ask: “Why am I allowed to take this?” and “Where in the code is this documented?”

Final Thoughts: Proactive Tax Strategy Matters

Thomas Castelli [40:10]
When you invest in real estate or run a business, you need CPAs who understand the space. These mistakes we’ve shared are just a sample of what we see weekly. Sometimes we can fix them, sometimes we can’t—and the tax savings are lost forever.

Cheaper tax prep often ends up being the most expensive mistake.

Q&A: Facebook Group Questions

Thomas Castelli [42:00]
Short-Term Rental Loophole Capped at $600K?
Not exactly. The excess business loss limitation (EBL) caps how much loss you can take against non-business income—around $628K for married couples. But that’s not specific to STRs; it applies across the board.

Justin Shore [43:56]
Claiming Bonus Depreciation After Selling a Property?
Yes, as long as you meet material participation requirements, you can still claim bonus on new properties. The time the buyer spends on your old property is irrelevant once you sell it.

Thomas Castelli [45:25]
What’s Going on with the SALT Cap?
As of May 22nd, the Senate bill raises the SALT cap to $40,000. That’s the current state, but it may change. This is especially relevant for high-tax states.

Closing Remarks

Thomas Castelli [46:00]
Thanks for joining us. If you’re investing in real estate, book a call with our team. These case studies are here to raise awareness. We hate seeing the same avoidable mistakes, and we’re here to help.

See you next time on the Tax Smart REI Podcast.

If you’re not already working with a qualified real estate CPA, start that conversation today. You can book a free 30-minute discovery call with our team using the link in the show notes. Don’t wait until it’s too late. Get ahead of the curve now.

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.