Working for yourself has almost endless upsides. You can work where you want, when you want, and achieve significant financial returns. That isn’t to say there aren’t also challenges. Expert advice and tips from a supportive broker or mentor will go a long way towards helping new agents navigate the ins and outs of running their own businesses, but some tasks loom larger than others. One of the scariest? Taxes. The tax code is complicated, and new (and some experienced!) real estate agents find themselves getting more and more nervous as tax season draws closer.
The good news? With a basic understanding of tax code, a bit of planning, and a solid plan, taxes don’t have to be a source of stress. Instead, you’ll save yourself some time, some sanity, and maybe some money, too!
What do YOU Need to Know About Taxes
According to Federal Tax guidelines, real estate agents and brokers are considered self-employed sole proprietors, even if they are an agent or are working for a real estate brokerage firm. Also, most real estate agents and brokers receive their income in the form of commissions. If you’re used to receiving traditional paychecks, you might be surprised when you see how different taxes look when you file as a self-employed sole proprietor! Fortunately, different doesn’t mean bad. In fact, there are some great deductions that real estate agents and brokers can claim to save some serious money come tax time.
One important note: you’ll need excellent records to take advantage of all the deductions you are entitled to. In some cases, specifically anything related to a property that depreciates in value, you’ll need to keep these records for years. Your home office equipment and furniture, and the car you use to show homes fall into the category, so keep detailed records in order to deduct expenses associated with these high-ticket items! A shoebox full of receipts and invoices isn’t a detailed record, by the way. At the very least you’ll need a well-considered filing system, and you should consider using software like TurboTax Self Employed or Quickbooks Self Employed to help you stay organized throughout the year.
The PATH Act, and How it Impacts You
The Protecting Americans from Tax Hikes (PATH) Act provides real estate agents and brokers some additional relief when it comes to business-related purchases by making changes to the IRS Section 179 deduction. Enacted in 2015, the PATH Act allows you to immediately deduct all or a greater portion of your purchase, which means bigger savings at tax time.
What Can You Deduct?
The short answer: quite a bit. Real estate agents need to invest money to make money, and the vast majority of these expenses are tax deductible. They don’t need to be major expenses or critical to your business to count. Even the smallest expenses add up over a year, so keep track of everything! Anything related to your business is potentially deductible – from marketing a property, to promoting yourself to potential clients, to transportation. For example, you can expense, or write off, up to $25,000 of the price of a new car for the tax year in which you bought it. There are certain limits to the type of vehicle that qualifies for this tax break, however, as well as limits to the amount of the allowable deduction.
Other common deductions for real estate agents and brokers include:
- Marketing expenses, including sales and open house signs and flyers; website development and maintenance; and business cards and mailers
- Real estate coaching, training, and education costs, Including workshops or conferences!
- Licensing and renewal fees
- Dues and fees associated with real estate associations, your multiple listing service (MLS) and brokerage desk fees
- Transportation expenses, including automobile maintenance and repairs, gas, mileage, auto insurance, parking, and new car purchase or lease costs.
- EXPERT TIP: Keep track of your mileage throughout the year using a cloud-based app to store all your information.
- Travel costs including, airfare, lodging, and meals for real estate education and business purposes.
- Home office expenses, whether you rent or own your home.
- Gifts ($25 deduction limit), entertainment, and other costs you incur to please clients and keep them coming back to you for their real estate needs. If the clients are a couple, then the deduction limit is $50 per couple per year.
As a rule, real estate business expenses must be: ordinary and necessary, directly related to your business and a reasonable amount in order to qualify as a deduction.
Taxes can be tricky, and making a mistake can be costly for you and your business. If you’re not sure how to file or if you want someone to check your work, approach a professional who is experienced in giving tax tips for real estate agents and can walk you through the ins and outs of tax season. Ask other agents or brokers in your area for recommendations. They won’t steer you wrong! And, if you don’t have a trusted real estate mentor yet, reach out. I’m happy to point you in the right direction.