In today's piece, I'll discuss 115 tax deductions for real estate brokers that I've uncovered over the course of my 11 years in the industry. Many of these deductions go unnoticed and underutilized by real estate brokers all around the country.
Before I begin, let me state unequivocally that I am not a Certified Public Accountant (CPA). Before filing your taxes or applying any of the suggestions in this article, consult with your CPA.
So, let's talk about taxes. They are something that everyone dreads, especially as an independent contractor. When you're a W2, tax season can feel like a mini-bonus when you get a refund for taxes you overpaid the prior year.
April, on the other hand, is when you have to dig into your funds and make one of the most significant cheques you'll likely write all year, especially if you're not filing estimated quarterly taxes.
For many years, this check had been in the tens of thousands of dollars, and it had been increasing year after year. Which is a positive thing in general because it means you're earning more money. Still, learning how Realtor tax deductions and techniques may work to my benefit as a real estate agent helped me find out how to start keeping more of my money.
Choosing An Outstanding CPA
It all started when I found a fantastic Certified Public Accountant (CPA) who would not only file my taxes but also sit down with me and explain how they operated so I could be proactive rather than reactive. A good CPA should be aggressive enough to explain how to strategically work your finances throughout the year to maximize your legal deductions rather than leaving a lot of money on the table for fear of an audit.
Of course, hiring a skilled CPA will cost you more than doing it yourself or hiring someone to file your taxes for you. However, the investment will pay off for years and decades to come.
Keeping Things Organized
Before we go into all of the deductions, it's vital to remember that the best way to maximize your real estate tax deduction is to keep your finances in order. When your CPA can see what you're dealing with, it's considerably easier for him to advise you and optimize your deductions.
You can hire a bookkeeper for roughly $200 per month, or you can learn how to perform your own bookkeeping using a platform like Quickbooks Online. Check out my post on Quickbooks For Real Estate Agents for more details.
Without further ado, here are 115 tax deductions for real estate brokers that I strongly advise you to investigate further.
Tax Deductions For Real Estate Agents In Marketing
The majority of real estate agent marketing expenses will qualify for a tax deductible. These forms of marketing materials, such as sales and open house signs and fliers, as well as business cards, are all tax deductible for real estate brokers. Other costs include website construction and upkeep, direct mail, Google and social media advertising, and ad management.
- Open House Signs
- Listing Yard Signs
- Listing Flyers
- Business Cards
- Website Development and Maintenance
- Direct Mail
- Advertisements on Google and Social Media
- Management Costs for Running The Ads
Education And Training
If you're a successful real estate agent, you're probably putting money into yourself through training, coaching, and continuing education. Audible subscriptions, real estate books, and online courses are all examples of continuing education.
- Mandatory Continuing Education
- Audible Subscription (if used for business purpose)
- Real Estate Agent Books
- Online Courses
Licenses And Dues
Being a real estate professional entails paying monthly, quarterly, and annual fees, as we all know. Because these constitute a tax write-off, keep a reasonable record of them.
- MLS Dues
- NAR Dues
- Association/Board Dues
- Brokerage Fees
- Desk Fees
- Royalty/Franchise Fees
- Chamber of Commerce
- Fees And Services
Services And Fees
Keeping track of the lesser services and fees is a good idea. By the end of the year, these smaller monthly recurring payments mount up. If the expenditures are related to your real estate firm, they are very certainly deductible.
- Bank Fees for Businesses
- Fees for Bookkeeping
- Ongoing App Subscriptions Business Licenses Interest on Business Purchases
- Internet Access
27.Service for Cell Phones (Percentage used for business)
- Real Estate Agents Can Take Advantage Of Insurance Tax Deductions
Insurance Tax Deductions For Real Estate Agents
Make sure you're keeping track of any business-related insurance you're paying for. Each E&O payment deducted from your commissions, a general company umbrella policy, private health insurance, and even a portion of your auto insurance are all covered under this policy.
- Insurance for Errors and Omissions
- Insurance for Small Businesses in General
- Health Insurance Provided by a Private Company (talked about more later)
- Insurance for automobiles
- A tesla charging station
Transportation And Automobiles
The ideal car for real estate brokers will be determined by your specific requirements. Taxes are included. For real estate brokers, automobiles can be a complicated tax deductible. Let me tell you, I've bought over 15 automobiles in the last 11 years, so I know how much of a nightmare they can be when it comes to deductions, especially when you switch them out as regularly as I do.
When it comes to claiming a vehicle tax deduction, you have two options.
Simple Method (Standard Mileage Deduction)
The straightforward technique of calculating the cost per mile driven for business.
The regular mileage rate for 2019 is $.58 per mile.
To put it another way, if you drove 10,000 miles, you could deduct $5,800 off your tax bill.
To the basic mileage deduction, you can also add registration fees and taxes, vehicle loan interest, car washes, tolls, and parking fees.
A Difficult Method (Itemized Deduction)
The more difficult way entails itemizing the many expenses incurred throughout the year to maintain and service your car or mode of transportation.
Here are the different deductions you can claim if you use the more complicated method:
- Gas and electricity are two types of energy.
- Costs of Leases
- Car Washes
- Interest on Auto Loan (not the payment itself though)
There are several methods for calculating depreciation as a business expense for a vehicle:
- Accelerated Depreciation (MACRS)
- Straight-Line Depreciation
- Bonus Depreciation
- Section 179 Deduction for Expenses
It's better to leave it to your CPA to figure out which method to employ and how to calculate depreciation. If you want to learn more about this, go to TurboTax's website and read this informative article.
Vehicles: The Bottom Line
The normal mileage deduction is probably your best bet if you drive a lot of miles (over 15,000 yearly) and your vehicle isn't very pricey (less than $30,000). If you have a high-priced vehicle and don't drive frequently, you're probably better off adopting the more complicated itemization method.
If you travel for real estate on a regular basis, many of your expenses are totally deductible. If you're mixing business and pleasure on a vacation, make sure you determine the appropriate percentage of time spent doing business so you may deduct the necessary amounts.
Real Estate Agents Can Take Advantage Of Meal Tax Deductions
It's a 50% write-off if you discuss work with a coworker, client, or friend while purchasing a meal. Make a note of who you ate the dinner with, as well as a phrase or two about what you talked about.
- Dinners (50 percent )
Deduction For Home Office
In recent years, the IRS has tightened the rules on the home office deduction. You must, first and foremost, be self-employed. That isn't an issue for real estate agents. If you work part-time, things get a little more complicated. If you're a part-time agent with a full-time salaried job, talk to your CPA about whether you should take a home office deduction.
Furthermore, your workplace must be completely dedicated to serving as your office. You can't have a dual-purpose arrangement or put your computer in the corner of your room, for example.
The home office deduction is based on a "honor roll" method, so be sure you can verify that you used the room exclusively for business in the case of an audit.
Finally, you have two options for receiving the deduction.
The simplest technique is to multiply the room's square footage by $5 (up to $1500). A 150 square foot room that you use solely as your workplace is an example. You can deduct $750 for your home office if you multiply that by $5.
A Difficult Method
The more difficult way is itemizing relevant costs linked with your home and multiplying them by the percentage of the home you utilize for your office.
The following are some of the associated costs:
- Mortgage Interest/Rent
- Property Tax
- Security System
Office Rent And Utilities
If you rent office space then the rent you pay is tax-deductible. Additionally, utilities, renters insurance, and any maintenance you may spend on the space would be deductible as well.
- Office Rent
- Office Utilities
- Renters Insurance
- Maintenance on Rental
- Internet Service
- Phone Service
Gifts ($25 Maximum Deduction)
Real estate agents are allowed to spend up to $25 on real estate closing presents, according to the IRS. This restriction may be a concern because many agents spend more on closing presents, referral gifts, and other items than this. If you can add your logo to the present, you may be able to address this difficulty. The gift then transforms into a marketing tool with new requirements. As a result, compared to a gift, a larger deduction would be permitted.
Real Estate Agents Can Take Advantage Of Sales Tax Deductions
As real estate brokers, we frequently encounter odd situations that necessitate novel answers. If these solutions cost money, you might be shocked to learn that real estate agents can claim them as tax deductions. Here are some of the things I've paid for that I've been able to claim as tax deductions over the years:
- Appraisal Fees
- CL100 (termite inspection) Fees
- Closing Attorney Fees
- Courier Services/Delivery Fees
- Finder Fees/Referral Fees
- Repairs on a Listed Property
- Home Warranty
- Inspection Fees
- Notary Fees
- Open House Expenses
- Staging Fees
Deduction For Self-Employed Health Insurance
We have a unique "opportunity" as self-employed people to pay for exorbitant health-care premiums. One advantage is that the premiums you pay for yourself, your spouse, and your dependents are completely tax deductible. This deduction reduces your overall adjusted gross income (AGI), lowering your tax bill for the year.
Also, the uninsured penalty for not having insurance has been eliminated in 2019 as a result of the Tax Cuts and Jobs Act.
- Health Insurance for Self-Employed People
Expenses For Business Equipment
If you're buying conventional business equipment like computers, cameras, and other similar devices, most of them are fully deductible in the year you buy them rather than having to depreciate them over several years. If you buy pricey equipment that costs more than $1000, check with your CPA to see if it can be deducted or depreciated.
- Camera and Lenses
- Cleaning Equipment
- Equipment Repair
- Spare Keys
- Hard Drives
- iPad or Tablet
- Lock Boxes
- Staging Items
- Measuring Equipment
Supplies For The Office
For office supplies, it's very self-explanatory. Write them off if you use them for business. I enjoy using my Amazon business account to buy just about everything. Having this new account allows me to keep track of which purchases are for business and which are for personal usage. If you only have one account for Amazon shopping, make sure you have a business credit card or bank account set up to keep your purchases separate.
- Client Refreshments (Coffee, Water, etc.)
- Copier Fees
- Cleaning Services
- Office Furniture
- Filing Cabinets
101.Cloud Storage of Business Files
Business Software And Tools
If you use software to run your real estate business, you can deduct the entire cost of the program, including lead generation subscription services like customer relationship management (CRM) software. Top programs like QuickBooks, Sage, and NetSuite not only make accounting easier, but they also make tax season less stressful.
- CRM (Check out my post about crm Systems)
- Other Business Software
Those Who Work For You (Including Virtual Support)
You're missing out if you haven't looked into hiring a virtual assistant through Upwork, Fiver, or Myoutdesk. Many experienced professionals are willing to help you with a variety of jobs, some of which are more specialized than others.
This is exemplified by the field of bookkeeping. Consider employing a virtual bookkeeper if you aren't good with numbers and don't want to learn the ins and outs of Quickbooks or another bookkeeping software. If your finances aren't too complicated, it's safe, straightforward, and relatively inexpensive.
Virtual assistants can also help with administrative tasks like data entry, social networking, filing papers, website management, and so on.
Many of these virtual assistants earn between $4 and $10 per hour, with $10 being reserved for highly skilled professionals with degrees.
- Transaction Management
- Family Wages
- Payroll and Unemployment (FUTA) Taxes
- Showing Assistant
- Real Estate Virtual Assistant
Contribution To A Retirement Plan
It's critical to have a real estate agent retirement strategy in place. Whatever plan you choose, make sure you're putting money aside for retirement every year. It's a good idea to max out your plan because you'll see that it can save you a lot of money on taxes, possibly even getting you into the next lowest income bracket.
There are several various plans to pick from, which I'll list below:
- SEP IRA (Self-Employed Pension)
The 2019 maximum is $56,000 or 25% of income, whichever is lower. This plan allows real estate agents to invest more money each year towards retirement than a standard IRA plan because they are self-employed. Remember that if you have employees other than yourself or your spouse, you must match whatever contribution percentage you choose for yourself for your qualified employees.
- Traditional Individual Retirement Accounts (IRAs)
The 2019 MAGI contribution limit is $6,000 ($7,000 over 50) for individuals and $193,000 for married couples. The deadline to contribute is April 15th. This plan is available to everyone, whether or not they are self-employed.
- 401(k) for one person
Individual contribution limits for 2019 are $19,000 for those under 50 and $25,000 for those over 50. However, similar to a corporate 401k, your employer can contribute to this plan as well — up to 25% of your salary. Individual and corporate contributions to this plan can total up to $56,000 each year, or $62,000 if you're over 50! To be eligible for this plan, you must be self-employed and have no workers in your business other than yourself and your spouse.
Services Of A Legal Or Professional Nature
Enlisting the services of a great CPA, as I mentioned earlier in the piece, should be the first step toward saving money on taxes. If you've made it this far, you're probably thinking to yourself, "But Kyle, why should I study and grasp all of this material so far?"
What a great question! As I previously stated, I've utilized a CPA for as long as I can recall. That said, I continue to pay close attention to my industry's standards and requirements so that I can not only HEAR but also UNDERSTAND what my CPA is saying me. When I originally started working with my CPA, I had complete faith in what he was doing and saying. Then I started learning and reading about the various tactics for myself, and as I gained a greater grasp of them, I was able to better embrace and comply with them.
- Tax Professionals
- Legal Professionals
Rental Property Losses In Real Estate
Rental property losses are one tax benefit of being a real estate agent and owning rental properties. We real estate agents, unlike traditional investors who may engage in real estate as a side hustle to supplement their regular income, can deduct any losses from rental properties from our taxable income, lowering our adjusted gross income (AGI).
This is a huge deduction because rental properties often generate positive cash flow and gains, but depreciation and other write-offs might result in a loss on paper.
Rental losses cannot be subtracted from "Salaried" income since rental revenue is considered passive income by typical employees outside of the real estate industry. For a self-employed real estate agent, this is not the case.
Even as a real estate agent, some requirements must be met in order to recover these losses. To see if you qualify, speak with your CPA.
- Losses on rental properties
S-Corp Election Status BONUS Tax Strategy
Each year, real estate brokers have a unique opportunity to save even more money on taxes. Real estate agents can save thousands, if not tens of thousands of dollars on self-employment tax by forming an LLC with an S-Corp election instead of working as a single proprietor.
Self-employed business owners typically pay 15.3 percent in self-employment taxes to the IRS (12.4 percent for social security and 2.9 percent for medicare).
Not Set Up As An S-Corporation
If you don't set up your company as an S-Corp, you'll have to pay 15.3 percent of your adjusted gross revenue in addition to your income tax.
For example, if you earned $100,000 in adjusted gross income after deductions, your SE tax alone would be $15,300 (not counting income tax).
Setup As An S-Corporation
If you form an S-Corp, you will be able to pay yourself a respectable salary as well as get dividends. The average annual compensation for a real estate agent is roughly $40,000.
Returning to our $100,000 adjusted gross income scenario, let's say you paid yourself a $40,000 salary and received $60,000 in dividends. You'd just have to pay the 15.3 percent SE tax on the $40,000 in this case.
In this case, your self-employment tax is $6,120, resulting in a tax savings of over $9,000.
A Few Points To Consider
Filing as an S-corp will almost certainly require more work from your CPA, which will likely raise prices.
On top of that, you'll have to pay Federal Unemployment Tax (FUTA) on your salary. The FUTA rate is 6.2 percent.
Last but not least, you'll need to verify with your broker to discover what is required to receive commissions into an LLC. To earn commissions into my LLC in Texas, I need my own broker's license and to be an associate broker at my brokerage.
Before using this technique, make sure to verify with your state's real estate commission and your broker.
However, do the arithmetic for your specific scenario to see if moving to an S-Corp LLC can save you money on taxes. It does for the majority of agents and brokers!
Taxes Are Due Every Quarter
Self-employed contractors must pay estimated quarterly taxes every three months unless they make less than $12,000 per year separately or $24,000 per year jointly with a spouse.
- January 15th
- April 15th
- June 17th
- September 16th
1099 Forms Are Due On January 31st
To avoid a penalty, if you hired contracted labor and are issuing a 1099 form to collect the actual expenses paid, you must file that contractor's 1099-MISC form by January 31st each year.
That pretty much sums it up! I hope that these 115 tax deductions for real estate brokers not only help you save money on taxes this year, but also help you plan forward for future tax savings.