As a real estate broker, do you feel like you do the work of five people? You spend way more time in the car than the typical commuter. You’re on the go so often that you find yourself eating out most of the time. When you’re at the office, you can never find pens to use, and you’re constantly running to the store to buy your own. And, on top of all that, you’re approaching your license renewal, which means you’ll have to find time for continuing education courses.
Fortunately for you, as a North Carolina real estate broker, the above list of nuisances entitles you to some valuable real estate agent tax deductions. Since the government considers you a business, regardless of whether you’re an independent or employed real estate broker, you can deduct expenses like gifts, meals, and entertainment.
Key Takeaways
- Real estate brokers can lower their taxable income by deducting expenses like commissions, marketing, meals, travel, office supplies, and more, ensuring they keep more of their earnings.
- Maintaining receipts, mileage logs, and other documentation is crucial for claiming deductions and complying with IRS regulations.
- The blog outlines deductions tailored to the needs of real estate brokers, including health insurance premiums and licensing fees, for everything from home office expenses to technology and software.
- While the blog provides a comprehensive overview, it’s critical that you consult with a qualified tax advisor to navigate individual circumstances and optimize tax savings.
Introduction to Tax Deductions for Real Estate Agents
As a real estate broker, maximizing your income isn’t just about closing deals—it’s also about understanding how to manage your expenses and reduce your tax liability. Tax deductions play a crucial role in helping you keep more of your hard-earned commissions. Knowing which deductions apply to you and staying compliant with IRS regulations can significantly impact your financial success.
Importance of understanding tax deductions
Understanding tax deductions is essential for real estate brokers because of the unique nature of your profession.
Many brokers are independent contractors, which means you’re responsible for covering business expenses and paying self-employment taxes. By taking advantage of legitimate deductions, you can lower your taxable income, reduce your overall tax burden, and reinvest those savings into your business.
Ignoring deductions or misunderstanding the rules can result in lost opportunities to save, which is a costly mistake.
Overview of IRS guidelines for real estate professionals
To determine an appropriate tax deduction, ask these simple questions and then consult with a tax professional.
- Does the expense occur regularly in the real estate field?
- Is the expense necessary for running/operating a real estate business?
- Is it a reasonable expense?
If the answer to the above questions is yes, you can most likely deduct that expense.
Of course, we do not pretend to be tax experts. You must confirm all tax liability information that you read on the internet. Still, common deductible expenses for brokers include advertising costs, office supplies, travel, and even a portion of your home office. However, to claim these deductions, you must maintain accurate records and ensure expenses are directly related to your real estate activities.
Familiarizing yourself with IRS rules, such as the distinction between deductible expenses and capital expenditures, is crucial for staying compliant and optimizing your tax strategy.
Common Business Expenses Eligible for Deduction
Let’s start our discussion about deductions by outlining some of the most common business expenses.
Commission and fees
If you received the full commission for a sale and paid your managing broker their split, report the full amount as income and the managing broker’s split as an expense. You must also issue a 1099-MISC to the managing broker for payments made during the year. If the managing broker received the full commission and paid you your split, report only your share as income with no expense.
Real estate brokers often pay fees, such as referral fees and MLS dues. These expenses are directly tied to generating income and are considered deductible by the IRS.
Business meals and entertainment
Meeting with clients or networking with industry professionals over meals is a routine part of a real estate broker’s work. The IRS allows you to deduct 50% of qualifying business meal expenses, provided they are directly related to your business activities.
While entertainment expenses are generally non-deductible, meals at events focused on business relationships or transactions may still qualify.
FAQ: Are client gifts deductible?
Are you giving gifts to clients? You can deduct the cost if it’s under $25 (per person/per year).
Technology and software
Real estate brokers rely heavily on technology to manage their business. Expenses for smartphones, laptops, cameras, and printers are often deductible, provided they are used for business purposes. The cost of software subscriptions, such as customer relationship management tools, real estate market analysis programs, and email marketing platforms, can also be deducted.
Home Office Deduction
If your home is your principal place of business, you may deduct a portion of your rent or mortgage, utilities, and maintenance expenses. You can opt for the simplified deduction ($5 per square foot, up to 300 square feet) or itemize your actual costs.
Vehicle and Travel Expenses
Most real estate brokers spend significant time in their cars, whether driving to client meetings, property showings, or networking events. The good news is that many travel expenses are tax-deductible, helping you offset one of your most frequent business costs.
Mileage deduction
Tracking your mileage is crucial since it’s often one of the most significant expenses for real estate professionals. The IRS allows you to deduct a standard rate per mile driven for business purposes, simplifying calculations. According to Intuit, the standard mileage rate includes gas, oil, tires, repairs, insurance, depreciation, license and registration fees, lease payments, and garage rent.
You may also be able to deduct interest paid on a car loan, your personal property taxes, and parking fees and tolls.
Actual expense method
Instead of using the standard mileage rate, you can opt for the actual expense method to deduct vehicle costs. This method involves calculating and deducting the actual expenses of operating your car for business purposes, such as fuel, maintenance, insurance, and depreciation.
If you use your vehicle for both business and personal purposes, only the percentage related to business use is deductible.
Travel for business purposes
In addition to local vehicle expenses, you can also deduct costs associated with business travel. This includes airfare, lodging, rental cars, and meals while traveling for work-related purposes, such as attending conferences or meeting out-of-town clients. However, these expenses must be directly tied to your real estate activities.
Marketing and Advertising Costs
You can deduct any costs you incur when marketing your business. This includes internet listings, social media ads, radio ads, billboards, print media, posters, flyers, etc. You can also deduct expenses related to promotional events.
Professional Fees
You can deduct fees paid to accountants, lawyers, consultants, or other professionals who assist with your business operations. This includes costs for tax preparation, legal advice, contract review, business planning, and marketing consulting. These services directly contribute to your business success, making them eligible as deductions.
Office Supplies and Equipment
Yes, your pens are deductible. You can also deduct money spent on postage, another significant expense for real estate brokers. Additionally, items like laptops, phones, software, and everyday supplies are fully deductible.
FAQ: Can I deduct my phone bill?
Yes, real estate brokers can deduct their phone bills. If your phone is used for both business and personal calls, you can only deduct the portion related to business use. For example, if 70% of your phone usage is for business, you can deduct 70% of your phone bill.
Depreciation of equipment
For larger, more expensive equipment, such as computers, printers, or office furniture, you may need to deduct the cost over several years through depreciation. The IRS allows you to recover the cost of these items gradually, reflecting their usage in your business. Alternatively, you may qualify for Section 179 deductions, enabling you to deduct the full cost of qualifying equipment in the year of purchase. Consult with a tax professional to determine the best approach for your business.
Health Care Costs
Self-employed brokers can deduct premiums for themselves, their spouses, and dependents. In addition, medical expenses that exceed 7.5% of your adjusted gross income may also be deducted if you itemize deductions on your tax return. This includes out-of-pocket expenses for doctor visits, prescriptions, dental care, and more.
Licensing & Education Fees
Fees involved with obtaining a license, permit, certification, and continuing education courses are deductible. (Yes, you can deduct your real estate post-licensing courses, too!) In addition, skill-enhancement training qualifies as a deduction if directly related to your current role.
If you keep up with subscriptions to Business Week and the Wall Street Journal, you can deduct subscription dues—as long as it’s a publication with content that can help you excel in the real estate business.
Record-Keeping and Documentation Tips
Proper record-keeping is crucial for real estate brokers to claim deductions accurately and remain compliant with IRS regulations. Organized documentation not only simplifies tax filing but also protects you in case of an audit.
Importance of accurate records
Accurate records ensure you can substantiate every deduction you claim. This includes maintaining receipts, invoices, mileage logs, and bank statements for all business-related expenses. Consistent and thorough documentation not only maximizes your deductions but also minimizes the risk of errors or penalties. Aim to record expenses as they occur to avoid overlooking deductible items.
Tools and software for record-keeping
There’s no excuse anymore for stuffing receipts in a shoe box. Here are just a few tools available to help you keep records for your real estate business taxes.
- Hurdlr: Designed for self-employed individuals, Hurdlr tracks income, expenses, and mileage automatically, simplifying tax preparation and expense reporting.
- TripLog: Ideal for mileage tracking, TripLog records your drives and calculates mileage deductions seamlessly.
- iSpending: A user-friendly app to manage and categorize expenses, making it easy to see where your money is going and organize tax-deductible costs.
- Shoeboxed: This app helps you digitize and organize receipts, ensuring all your expense records are in one place for easy access during tax season.
Using these tools can streamline your workflow, reduce errors, and save time when preparing your taxes.
Countless brokers miss out on saving each year by not accurately reporting some of the above tax deductions. Now that you’ve had a refresher on what tax deductions you may be entitled to determine if you’re ready to do your taxes.
The above content is for general informational purposes only. Taxes and deductions are dependent on your individual circumstances. Please consult with a tax advisor.
