Most real estate agents are self-employed or independent contractors, which affects how taxes are paid and how much is owed. If you’re in real estate, it’s helpful to brush up on specific tax tips for real estate agents – including real estate agent tax deductions so you can file correctly and receive all the tax breaks appropriate for your business.
Whether you’re preparing your taxes on your own or having an accountant help you, here are some tips to keep at the forefront of your mind.
Key Takeaways
- Real estate agents can lower their taxable income by leveraging essential deductions such as home office expenses, vehicle mileage, marketing costs, and professional fees. Understanding these deductions ensures agents aren’t overpaying on their taxes.
- Keeping personal and business finances separate, using dedicated accounts, and leveraging tools like mileage trackers or accounting software can simplify bookkeeping and tax preparation.
- Set aside a portion of commissions for quarterly tax payments to avoid penalties. Additionally, explore options like IRAs or Roth IRAs to secure retirement savings while optimizing tax benefits.
- Consult tax experts to avoid errors, especially regarding employee classification and deductible expenses. Staying informed and organized can save money and prevent potential penalties.
8 Tax Tips for Real Estate Agents
Whether you’re a seasoned agent or new to the industry, understanding tax strategies and deductions is essential to minimizing your tax burden and maximizing your take-home pay. Here, we combine expert tips and insights to provide a complete guide for real estate agents during tax season.
1. Deduct your mileage.
“Many real estate agents leave money on the table when it comes to their mileage,” says Thomas J. Williams, an agent and tax accountant who operates Your Small Biz Accountant, LLC, a virtual boutique practice focusing on rental real estate. “Depending on where you work on a regular basis, the tax deduction may include attending meetings, putting up for-sale signs, running business-related errands, and completing floor time at your broker’s office.”
According to the IRS website, the current standard deduction for business use is $.67 per mile.
Pro Tip: Use a cloud-based mileage tracker app to record how many miles you drive for your business.
2. Accurately classify team members
Make sure you’re not classifying W-2 employees as independent contractors. Independent contractors should be issued a 1099 form, while actual employees get a W-2.
“If they are fellow REALTORS® and make commissions, they can be 1099s,” says Jeffrey A. Schneider, an enrolled agent specializing in helping real estate agents with taxes. “However, depending on the state, the broker usually pays the commissions, not their “team leader.” If they are paid to perform other duties outside that of being a licensed REALTOR®, they may be deemed an employee for those items and all that goes along with payroll.”
The same applies when hiring someone to perform clerical or other office duties. “Most people tend to want to go with the 1099 route to avoid payroll-related issues,” says Schneider. “That is a very bad assumption to make.”
A better option is to stay within the law by correctly classifying your employees when hired or consulting a tax professional to make the proper changes to your payroll.
3. Watch limits on gifts
In a people-facing role, it’s important to remember the small touches that make your clients feel appreciated. But watch how you’re expensing the gifts you buy.
“Gifts are big issue,” says Schneider. “Gifts are deductible to the extent of $25 per person per year. Or, if your client is a couple, then it’s $50 per couple per year.”
That means if you’re buying a big-ticket item for your clients, like a washer or dryer, you can’t claim the total cost of the gift.
4. Save for retirement.
Many real estate professionals might not have a 401(K). However, this doesn’t mean you can’t save for retirement come tax time. One consideration is to fund an IRA. You might want to consider funding a Roth IRA if you’re at the start of your career and still in a lower tax bracket. Roth IRAs don’t provide a tax break for contributions, but pulling the money out of the Roth IRA is usually tax-free. If you’re in a lower tax bracket right now and don’t need the tax break, you might consider this an option to save for retirement.
Related Article: Best Places to Retire in the U.S. in 2024
5. Understand the rules regarding filing an extension.
Time management can be tricky. If tax day is coming too soon for you to get organized, you can file an extension to file taxes later. But remember, this extension doesn’t allow you to pay your taxes at a later date. You’ll have to pay an estimate of what you think you’ll owe on time. Then, when you file your taxes, you can account for any adjustments.
6. Keep personal and business finances separate.
Open separate accounts for your business transactions to simplify your bookkeeping. When you get your commission check, deposit it into your business account, and then “pay yourself” by transferring some of that money to your personal account.
7. Save for taxes
Since most agents operate as independent contractors, taxes aren’t withheld from earnings. Set aside a percentage of each commission for estimated tax payments, typically due quarterly, to avoid penalties.
8. Consult a tax professional
Taxes can be tricky, and making a mistake can be costly for you and your business.
Remember, ignorance is not an excuse when it comes to taxes. Consult with a tax expert to ensure you are following best practices.
Essential Tax Deductions for Real Estate Agents
Maximizing deductions can reduce taxable income and increase your bottom line.
Here are key deductible expenses to help you improve your bottom line.
1. Home office expenses
If your home serves as your principal place of business, you can deduct a portion of your rent/mortgage, utilities, and maintenance costs. Choose between the simplified deduction ($5/sq. ft. up to 300 sq. ft.) or itemized expenses.
2. Vehicle expenses
If the vehicle is used for personal and business purposes, only the expenses related to the business portion can be deducted based on the number of business miles driven. There is no limit to the number of miles that can be deducted.
Talk with a tax professional to learn the actual expense method for vehicles.
3. Marketing & advertising
Expenses for digital ads, print materials, social media promotions, and other marketing efforts are 100% deductible.
4. Continuing education & training
Costs for real estate licensing courses, CE requirements, and skill-enhancement training qualify as deductions if directly related to your current role.
5. Professional Fees
Deduct fees for accountants, lawyers, or consultants who assist with your business operations.
6. Office supplies & equipment
Items like laptops, phones, software, and everyday supplies (e.g., paper, pens) are fully deductible.
7. Travel & meal expenses
Business travel costs, including transportation and lodging, are deductible, as are 50% of meal expenses incurred during client meetings or industry events. Keep records of these meals in case the IRS questions them in the future.
8. Real estate license & dues
Annual fees for maintaining your real estate license and memberships to organizations like the National Association of REALTORS® are deductible.
9. Health insurance premiums
Self-employed agents can deduct premiums for themselves, their spouses, and dependents.
10. Desk fees
Many brokerages charge desk fees for office space and resources, which are deductible.
11. Charitable donations
Donations to IRS-recognized nonprofits can reduce your taxable income, but proper documentation is essential.
Tools to Simplify Tax Preparation
Even if you use a tax professional to prepare your taxes, you still need to keep track of receipts and financial information. Here are some general tools to consider:
- Mileage tracking tools
- Accounting software
- Receipt management apps
- Budgeting tools
Proactive tax planning and leveraging available deductions can significantly impact your financial outcomes. For additional guidance on managing your real estate business finances, consider continuing education courses covering financial strategies and agent tax requirements.
For helpful real estate continuing ed and professional development, turn to Colibri Real Estate School. We offer quick, convenient, and helpful real estate CE options – and our course fees may be tax deductible!
