Real estate appraisal, sometimes referred to as property valuation, involves coming up with a professional opinion about property value. Real estate appraisal services are critical where real estate transactions are involved. This is because, unlike other types of assets, real estate is not traded daily. Lana is currently a specialist at offering real estate appraisal services. However, due to the lack of professional qualifications on the fundamentals of tax, she is forced to contract a surveyor unless she completes a course on the field she does.
The new role comes with added responsibilities related to tax issues as far as real estate is concerned. Lana, as a proprietor, should change her accounting methods in valuing real estate. However, she should first file a Form 3115 with the IRS (Rupert & Anderson, 2019). Generally, there are two methods of accounting in real estate activities – cash and accrual. These two methods differ substantially in terms of the method of reporting income and expenses in tax returns. Cash income becomes taxable when the amount is received. On the other hand, the accrual method recognizes income regardless of whether it is paid or not.
Delegate your assignment to our experts and they will do the rest.
A critical question arises; since the two differ, which one is the best for Lana? Notably, the choice of the accounting method should depend on Lana's business needs. An advantage associated with the cash method is its simplicity in the sense that Lana will only have to pay taxes on money that is received (Rupert & Anderson, 2019). Through this method, a proprietor can delay payment receipt until tax time concludes, thus reducing taxable income. Compared to the accrual method, the cash method is a more advantageous approach as far as taxes are concerned. It is the approach Lana should use.
References
Rupert, T. & Anderson, K. (2019). Pearson's Federal Taxation 2020 Individuals . Pearson Education, Incorporated.
