Real estate agents are, in essence, business owners. You build your client base and operate independently, even if you work under a broker. Since real estate agents rely solely on commissions from sales, you aren’t on salary with an employer and are technically considered self-employed.
For tax purposes, this means you have to pay self-employment tax, which can take a big chunk out of any money you bring in. However, it also brings good news in the form of deductions you can claim.
Real Estate Agent Tax Deductions
Plenty of service-based professionals work as independent contractors, which puts them in the same tax situation as any other business owner. Startup entrepreneurs must also pay their own taxes, starting with quarterly installments spread throughout the year and ending with a reconciliation process at tax time. The visit to your tax preparer in April will be to make sure you’ve paid enough in taxes throughout the year to prevent you from owing. Salaried and hourly workers who are on a business’s payroll do the same thing, but they have a little help from an employer taking the money out and submitting it to the IRS on their behalf.
Deductions are a great way to protect some of the money you made throughout the year. The IRS recognizes that independent contractors, like business owners, have a number of expenses related to bringing in all that money.
There’s a long list of items you can deduct as an independent contractor, but the test is generally, if you spend money specifically for business purposes, it’s likely deductible. This can be a bonus since some expenses, like your home internet and your smartphone, are items you would buy anyway. In those cases, you’ll claim the percentage of the expense that was for business use.
Tracking and Inputting Deductions
Tracking business expenses is easier than ever, thanks to the many apps available. Many of these apps make it easy to scan and save receipts, with the information automatically added to your bookkeeping software. If you make a concerted effort to track everything starting Jan. 1, you’ll find it’s much easier to move forward when you’re ready to file, rather than spending hours trying to track down information.
A self-employed professional itemizes his deductions on Schedule C, Profit or Loss from Business. The categories include items like advertising, travel, supplies and taxes and licenses. You will simply separate your expenses into those categories and total it all up to come up with your total expenses. These expenses will be subtracted from the amount you earned during the tax year, and your taxes will be based on that reduced amount, so you can see the importance of coming up with business-related deductions.
Equipment Purchases and Taxes
Any business has costs related to making things happen. From the day you decide you are going to start a business, you’ll need basic supplies to get started, including at least a computer and cell phone. You’ll also need internet connectivity and a plan for that cell phone.
You likely will decide to use equipment you already own, as many business owners do, and this is perfectly acceptable. It’s called converting personal property to business use and isn’t nearly as official as it sounds. For an independent contractor, it simply means calculating the adjusted cost basis and claiming it on your taxes.
Calculating the adjusted cost basis involves looking at the original purchase price you paid when you bought the item and the fair market value of that item today, then taking the lesser of those two amounts and claiming it on your taxes. In the vast majority of cases, you’ll be inputting the fair market value on your taxes, since most equipment goes down in value, not up.
So, if you purchased a MacBook computer two years ago for $1,200 and today that same model sells for $800, that laptop will be $800 when you add it to your business expenses. You will then need to calculate the depreciation on that laptop so that you can input it on your tax return.
Depreciating Versus Full Value
Most of the items you’ll use for your real estate business will depreciate in value – the car you drive for showings, the laptop you use for everything you do and the printer-scanner-copier combination you use to print contracts and capture important documents. Knowing this, the IRS has taxpayers enter certain expenses as depreciable assets which, in short, means that you claim the expense over the course of multiple years rather than inputting that $1,200 you spent on a laptop or the used $800 laptop you had at the start of your business.
For computers and other electronics, IRS allows a five-year depreciation period. This means on Form 4562, you’ll input the total of all assets put in service in a year on line 19b. Before you input your items, though, you’ll need to depreciate them over a five-year period.
The IRS directs you to the Modified Accelerated Cost Recovery System to calculate your depreciation. These tables will help you determine what percentage of the cost to deduct in the first, second, third, fourth and fifth years.
Professional Learning Expenses
Real estate agents are constantly learning. To keep up your license, you’ll be required to at least occasionally take continuing education classes and workshops. Any expenses related to learning and growing your business are deductible, including the cost to travel to conferences and seminars that can help you improve your business. If you subscribe to any publications or hold memberships in organizations like the National Association of Realtors, you’ll be able to deduct those fees, as well.
Although the changes under the Tax Cuts and Jobs Act don’t affect many realtor tax deductions, there is one notable change coming up. Previously, agents could charge 50 percent of any meals they consumed while traveling for business. They could also deduct 50 percent of any entertainment expenses, as long as they were directly related to doing business.
The meal deduction remains intact, but the entertainment deduction has been eliminated. This has, however, raised some confusion from professionals, who aren’t sure where the line between “meals” and “entertainment” resides. Experts advise business owners to try to hold client meetings at venues that couldn’t be misconstrued as entertainment. Dinner at a restaurant is one thing, in other words, while dinner at a comedy club is another.
Real Estate Agent-Specific Deductions
Although many deductions for real estate agents are fairly general, there are some common tax write-offs seen whenever real estate agent taxes are filed. Although every professional must market themselves somewhat, real estate agents usually must invest heavily in print marketing, whereas many other service-based business owners can spend most of their time and money on online marketing.
Every real estate agent needs a professional-quality photo for their web presence, as well as for the signs and other print materials they use to sell a house. That expense can be deducted, as can the cost of printing signs, flyers, banners and promotional mailing materials.
You’ll have many other ongoing costs as a real estate agent. If you need lockboxes to place on doors, you’ll have to buy those. You may also sink some of your own money into staging some of the homes you sell or buying cookies and coffee for guests at your open houses. All of these costs are tax deductible, as long as you maintain documentation of them.
Personal Appearance Deductions
As many deduction options as real estate agents have, there are a few things that simply won’t work. You may find it important to spend extra on hairstyling and makeup to make sure you’re picture perfect before meeting clients at a home. You cannot deduct these expenses, nor can you deduct the cost of clothing or plastic surgery, even if you’re solely paying for these items to improve your sales.
One exception to these rules is when you’re preparing for photo shoots. There’s a one-time use requirement attached to tax deducting anything you buy in preparation for getting your business pictures taken. If you have your hair styled for the day, for instance, or your makeup done, you’ll be able to deduct those expenses, since they won’t benefit you beyond the day of the shoot. However, if you purchase new makeup or have your hair cut or colored, you can’t deduct those expenses because you’ll be able to enjoy them after the shoot.
Auto Expense Deduction
Real estate agents spend a great deal of time in their cars – usually far more time than professionals in many other fields. Get ready to work, though. You’ll need to track your mileage and use the standard mileage rate of 57.5 cents per mile in 2020 to determine how much to claim on Schedule C.
In the end, you may decide it’s easier to maintain a separate vehicle for business use, since you can simply log the mileage at the start of the year and subtract it from the mileage you have at the end of the year to get an exact figure. There are apps that can help you track your mileage in detail to make all of this easier. If you’d rather deduct the exact cost, you can track the actual costs of using your vehicle, including the money you spend on gas, oil changes and repairs; you may come out better this way.
In addition to operational costs, you can also deduct at least some of the cost of buying or leasing a new car. If you buy a new vehicle, you’ll have to depreciate it over multiple years, but if you lease, you can deduct the monthly payments. Of course, many real estate agents put so many miles on a car, the mileage limits may be an issue.
Deducting Your Office Space
One of the most popular real estate deductions for self-employed professionals is the home office deduction. This means you can deduct the space you use for your business. The area you claim must be exclusively for business purposes, so if you work from your bed, you can’t claim it. You must also use the space regularly for business, so it needs to be an area of your home where you go to check emails and print contracts.
Although you can figure up a percentage of your mortgage and all of your other expenses, the easiest way to claim the deduction is to use the simplified option. This involves just figuring up the square footage, up to 300 feet, and multiplying that by $5.
You may also have a place you call “home” at your local brokerage firm. Some real estate agencies rent desk space to agents who need it. If you’re charged to use space, equipment, or conference rooms at these locations, you can tax deduct those costs, as well.
- IRS: Depreciation and Amortization
- IRS: How To Depreciate Property
- RSM: Meals and entertainment expenses after tax reform
- Fit Small Business: Top 25 Realtor Tax Deductions – Are You Paying Too Much?
- IRS: Simplified Option for Home Office Deduction
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.