Most real estate agents are self-employed or independent contractors. This 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 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.
8 Tax Tips for Real Estate Agents
We asked real estate and tax professionals for their best tax tips. Here’s the advice they offered.
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.
Tip: Keep track of your mileage using a cloud-based app to store all your information.
2. Accurately classify your team.
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 gift expenses.
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 its $50 per couple per year.”
That means if you’re buying a big-ticket item for your clients, like a washer or dryer, the amount you can claim is limited because it’s classified as a 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.
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. Know your business expense deductibles.
Commonly called tax write-offs, deductions are expenses that can be subtracted from your total income so you can be taxed on a lower amount than you actually earned. Make sure you know what expenses can be used as deductibles so you can keep track of those expenses throughout the year.
7. Keep personal and business finances separate.
Simplify your bookkeeping by opening separate accounts for your business transactions. 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.
8. Consult a tax expert.
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. Make sure you are following best practices by consulting with a tax expert.
Real Estate Agent Tax Deductions
Here are some possible real estate agent tax deductions. Please consult with a local tax preparer to understand the rules regarding these deductions.
- Car expenses
- Training or education expenses
- Marketing expenses
- Home office expenses
- Food & entertainment expenses
- Software expenses
Receive more advice on operating the financial side of your real estate business by taking real estate CE courses with Colibri Real Estate. Not only will the course fees be deductible, but you will also be able to learn actionable strategies to help you navigate quarterly tax requirements.
