Real estate agents know that this career often requires investing much of your own time and personal finances before seeing the fruits of your labor. Tax season can be rough, but if you stay on top of your finances, document all important deductions, and understand your true profit by year end, you’ll appreciate the savings. It’s extremely important to set up a basic filing system to organize all paper receipts, income documents, checks and credit card statements for all transactions that relate to the business you conduct. It’s also important to keep receipts for property that depreciates for as long as you own them. Documenting all of your eligible tax deductions has the potential to help you save thousands of dollars.
Usually, real estate agents receive a 1099 tax form and receive compensation as an independent contractor, meaning that most agents are considered self-employed. Therefore, a schedule C (profit or loss from business) must be filed. Agents can write off deductions directly from income but may be subject to Self-Employment Tax on profits.
Learn about The PATH ACT
The Protecting Americans from Tax Hikes (PATH) Act provides real estate agents and brokers relief when it comes to business-related purchases by changing the IRS Section 179 deduction. The PATH Act was established in 2015 and allows you to deduct all or a greater portion of your business related purchases which translates into bigger savings on taxes. For example, since agents use their cars for showings, you can write off up to $25,000 for the price of a new car the year you purchased it.
Important tax deductions to remember
Aside from large purchases, there are minor costs that add up over the year that can also be deducted. Some may not even be apart of your every day business, but are still allowed. Make sure that you are only deducting things that you pay for personally and not your brokerage.
Take advantage of these common real estate agent and broker deductions:
-Marketing and sales assets. Open house signs, flyers, cards, mailers etc. You can also deduct marketing expenses like website development and maintenance and even the money that you paid to have the assets designed.
-Marketing and advertising spend. This includes all money you put towards digital advertising.
-Internet and phone. Any bill that you pay for and are not reimbursed can be written off.
-Real estate training. Coaching, and education costs including books bought for personal use.
-Real estate licensing. Any renewal fees, licensing fees, association dues, and MLS dues.
-Transportation. Automobile maintenance repairs, gas, mileage, auto insurance, parking and new car purchase or lease costs. Tolls, ravel airfare, lodging, meals during real estate education or conducting business with clients. Taxi and uber fare when seeing clients is also included.
-Home office costs.
– Gifts ($25 deduction limit) & entertainment. Entertaining and client thank you’s can be a large expense of any successful real estate agent. However, be careful here, as you may have a hard time explaining a $2,000 dinner at the Ritz. In most cases, you are able to write off half.
-Cold callers. Sales assistants and virtual assistants also qualify for this deduction. If their earnings come out of your pocket, you can deduct them.
-Prospecting lists. This is often overlooked by agents, but can be deducted if you purchase them using your own money and not by the brokerage or firm.
-Commissions paid. Absolutely do not forget to list all of the commissions you pay to other agents or brokers. Top real estate agents say that commissions paid on split listings or other arrangements can add up to by the biggest tax deduction.
-Retirement plan contribution. If you haven’t already began this process, you should!
-Insurance. General business insurance and E&O Insurance is deductible. You must have your own policy and cannot be covered by your brokerage, unless it’s covered by desk fees, then it’s deductible.
-Legal services. This includes all lawyer fees that you’ve accumulated from your business over the year.
Keep in mind that to qualify as deductible, real estate business expenses must be: ordinary and necessary, directly related to your business and a reasonable amount. IRS Publications 463 and 535 can help you determine whether a specific expense is tax deductible (SOURCE: TURBOTAX.COM).
Be smart about how you claim your deductions and make sure you have the correct documentation to back them. Use your calendar to remind yourself to file receipts or use an app to take a picture of everything and digitally organize it. While there are many ways to cut corners in the tax system, the potential harm outweighs the benefit and may ruin your career. Stay organized throughout the entire year so that when April rolls around, your prepared to receive the best outcome for you and your business.