Due Diligence
In tax practice, due diligence includes required paid-preparer checks for specified tax benefits and filing status. In real estate, it is the investigation period in a real estate transaction during which buyers thoroughly examine the property, review documents, and verify all aspects of the purchase before finalizing the deal.
🎬 Video Explanation
Exam Tip
Due diligence = buyer investigation period. Includes inspections, title search, surveys. Buyer can cancel for issues found during this period.
EA exam baseline: For the 2026–2027 SEE, use Tax Year 2025 and federal tax law through December 31, 2025. Later-year amounts below are explicitly labeled comparisons, not the default exam year. IRS SEE policy.
What is Due Diligence?
Due diligence is the comprehensive research and investigation buyers conduct before completing a real estate transaction. This period allows buyers to verify property condition, legal status, and all material facts before they are legally bound to purchase.
Due Diligence Activities
| Category | Activities |
|---|---|
| Physical Inspection | Home inspection, pest inspection, roof inspection |
| Environmental | Environmental assessment, soil testing |
| Legal Review | Title search, survey, deed review |
| Financial | Appraisal, rental history, operating expenses |
| Regulatory | Zoning verification, permit history, code compliance |
Due Diligence Timeline
| Phase | Typical Duration |
|---|---|
| Inspection Period | 7-14 days |
| Title Review | 5-10 days |
| Survey | 7-10 days |
| Environmental | 14-30 days |
| Overall Due Diligence | 14-45 days (varies by state) |
Physical Due Diligence
| Inspection Type | What It Covers |
|---|---|
| General Home Inspection | Structure, systems, components |
| Pest/Termite | Wood-destroying organisms |
| Roof | Condition, remaining life |
| HVAC | Heating and cooling systems |
| Sewer/Septic | Sewer line or septic system |
| Radon | Radon gas levels |
| Mold | Mold presence and type |
Legal Due Diligence
| Item | Purpose |
|---|---|
| Title Search | Verify ownership, find liens |
| Survey | Confirm boundaries, encroachments |
| Deed Review | Check restrictions, easements |
| HOA Documents | Review rules, financials, reserves |
| Permit History | Verify work was permitted |
Financial Due Diligence (Investment Properties)
| Analysis | Information Gathered |
|---|---|
| Rent Roll | Current tenant income |
| Operating Expenses | Actual costs to operate |
| Lease Review | Terms, expirations, options |
| Tax Records | Property tax history |
| Insurance Costs | Current coverage and premiums |
Due Diligence Fee
| State Practice | Description |
|---|---|
| Due Diligence Fee | Non-refundable fee paid to seller (NC, some states) |
| Earnest Money | Refundable deposit during contingency period |
| Option Fee | Fee for option period (TX) |
Ending Due Diligence
| Outcome | Result |
|---|---|
| Satisfied | Proceed to closing |
| Issues Found | Negotiate repairs/credits or cancel |
| Major Problems | Cancel and get earnest money back |
| Deadline Passed | Contingencies may be waived |
Exam Alert
Due diligence is the buyer's investigation period. Includes inspections, title review, surveys, and document review. Earnest money is typically refundable if buyer cancels during due diligence period for valid reasons specified in contract.
2025 EA Exam Notes
For EA tax practice, paid preparers must meet IRC Section 6695(g) due diligence for EITC, CTC/ACTC/ODC, AOTC and HOH status. Complete Form 8867, compute credits, make and document reasonable inquiries, and retain required records. For returns filed in 2026, including a 2025 return, the penalty is $650 per failed benefit/status requirement. Retain the records for 3 years from the latest of the return due date, e-file date, signature date when not e-filed, or date supplied to the signing preparer when not signing. IRS due diligence rules.
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Pre-licensing on AceableAgentRelated Terms
Contingency
A contingency is a condition or clause in a real estate contract that must be satisfied before the transaction can close, allowing buyers to cancel without penalty if the condition is not met.
Earnest Money
Earnest money is a deposit made by a buyer to show good faith when making an offer on a property, which is typically applied to the purchase price at closing.
Appraisal
An appraisal is a professional assessment of a property's market value, typically required by lenders before approving a mortgage to ensure the loan amount is appropriate.
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