16 Best Tax Deductions for Independent Real Estate Agents in 2016
As a busy real estate agent, so much of your time is devoted to clients, colleagues, brokerages, and of course developing leads into new business.
Staying on top of all your business expenses and finances often gets pushed down the list of priorities. And when you do sit down to organize your finances, tracking down every receipt and dealing with complicated accounting and tax software can quickly become a nightmare.
Even if you’re diligently keeping every receipt in a folder and use Excel to track finances – we call that “spreadsheet accounting” – this method of record-keeping can be tedious and time-consuming.
Independent real estate agents wield a double-edged sword: you’re business owners who have the freedom to work on your own schedule without a boss.
There is no ceiling to how much money you can make if you work hard enough. The downside is brokerages are not traditional employers, so taxes are generally not automatically withheld from your commissions paycheck – but make no mistake, the IRS still wants your tax dollars!
Real estate agents are also responsible for the so-called “self-employment” tax, which is a combination of the employee and employer’s portion of Social Security and Medicare tax.
With the additional responsibilities of independent business owners like yourself, things can get confusing fast. That’s why it’s important to know exactly what you owe, when you owe it, and how to reduce your tax bill as much as possible.
The typical real estate agent’s business expenses during the year average $6,500, while top performers’ expenses can exceed $10,000.
If you’re not tracking and deducting all of your eligible business expenses, you’re shrinking your net income and Take-Home pay by paying too much in taxes. If you had time in your busy schedule to monitor every expense you would.
In fact, nearly all of the real estate agents we polled want to improve their accounting and tax process in some way.
That’s where Hurdlr comes in. In addition to our app designed exclusively for busy agents like yourself, Hurdlr for Real Estate Agents, we wrote this guide to identify the 16 best tax deductions for independent real estate agents.
When tax time comes around, you’ll be armed with the knowledge that helps you save time and money, so you can focus on building more business and selling more homes.
Commissions paid by your business to other agents or employees that work with or under you are generally fully deductible business expenses that no entrepreneur should overlook. Depending on your business structure, commissions can quickly add up and end up being one of your largest deductions.
Example: Emilio owns a small real estate business where he specializes in flipping houses for homeowners who need instant cash. He contracted with two other real estate agents and agreed to pay them a 5% commission on all sales. Last year, one of his contractors had $700,000 of sales, the other $1,000,000. Emilio would deduct $85,000 (5% x $700,000 + 5% x $1,000,000) of commission expenses on line 10 of his Schedule C.
Where to Take It: Line 10 of Schedule C.
Standard Auto Deduction
If you use a vehicle for business you may be eligible to deduct your auto expenses based on how many business miles you drove. In 2016 you can deduct $0.54 for each business mile driven. The standard mileage deduction is available for self-employed individuals and drivers who use their car for hire or ridesharing (taxi, Lyft, and Uber). It is also available for individuals using their vehicle for a job-related move, charity, or medical purposes, although these activities are deductible at different rates. If you want to take advantage of this deduction you’ll need to track your miles. You should also know that there are a few circumstances that can prohibit you from deducting your miles, however you may still be able to deduct your vehicle expenses based on actual expenses.
Example: Patrice, a Washington, D.C.-based real estate agent for Fine Homes Realty, drove four thousand miles last year for his business, which can be deducted at a rate of $.54 per mile. Patrice could knock $2,160 off of his taxable income by taking the mileage deduction. Depending on his effective tax rate, Patrice could save a pretty significant sum of money!
Where to Take It: Line 9 on Schedule C.
Legal & Professional Services
Real estate agents can deduct legal and professional fees to the extent they are an ordinary part of and necessary to operations. Legal and professional services is a broad category that generally includes expenses for your lawyer, accountant and any other professional consultants agents may hire.
Example: Frederik, a real estate agent, recently listed a property for a longtime client that was in terrible condition. He spent $15,000 of his own money on professional fees charged by an engineer, architect, and designer he hired to help him bring this new listing to market. Fred thought it was a smart business decision because it was a longtime client, and his commission was going to be substantial. When he prepares his Schedule C, all of these costs could be deductible business expenses.
Where to Take It: Line 17 on Schedule C
The IRS allows you to deduct reasonable advertising expenses that are directly related to your business activities. The deduction for advertising expenses is broad and can include a number of expenses.
Example: Gayle, a real estate agent, deducts as advertising expenses all of her sell-side marketing expenses including staging, brochures, ad placements, photography costs and open houses.
Where to Take It: Line 8 on Schedule C
Home Office Deduction
You may be eligible to deduct the portion of your home expenses related to your business through the home office deduction, however there are a few things you need to know: Your home office needs to be used exclusively for business. This means your couch, exercise room, and kitchen table don’t count. Your home office needs to be a fully dedicated work space. Further, it needs to be used regularly for management and administrative functions. You can take it in two ways, simplified and regular (see below for details).
Example: Annie Agent is an independent realtor who has a separate room in her home (200 sq. ft.) that she exclusively uses to operate her brokerage business. She meets the requirements for the home office deduction and opts to take the simplified deduction. When Rachel prepares her tax return she would deduct $1,000 for her home office on line 30 of her Schedule C.
Where to Take It: If you are deducting actual costs for your home office report total from Form 8829 on Line 30. If you are using the simplified method, report amount from worksheet in Schedule C instructions on Line 30.
Donating to charity is not only personally fulfilling but it can also save you money on your taxes if you itemize your deductions. Regardless of if you donate personally or if you donate through your business, your charitable contributions will be reported on Schedule A of your 1040. Generally, charitable deductions are limited to 50% of your AGI (Adjusted Gross Income), however, if you are donating capital gain property or donating to certain types of organizations your deduction may be limited to 30% or 20% of your AGI. Before you donate, check our link below to see if the organization you will be contributing to is an IRS-exempt organization.
Example: Annie Agent attends a charity golf tournament organized by her newest client. Her AGI is $70,000, the charity fee to play is $400, and she purchases $300 of raffle tickets during the event. Assuming it would normally cost $200 for a tee time and food and drinks on the course, Annie could deduct $200 on her Schedule A. The deductible amount is calculated by finding the excess of the charity fee over the fair market value of the item ($400 – $200). Note that the raffle tickets she purchased are non-deductible and her 50% AGI limit is $35,000, which is well above $200.
Where to Take It: Lines 16-18 on Schedule A of Form 1040 (If you itemize deductions)
If your net earnings from self-employment are $400 or more, don’t forget that in addition to paying income taxes, the IRS requires that you also pay self-employment tax, which is similar to the Social Security and Medicare that would be withheld from your pay if you had a 9-to-5 job. Currently, the self employment tax rate is 15.3%. However, you can deduct a portion of this tax when you file your tax return at the end of the year. If you are subject to paying self-employment tax, you can deduct one-half (50%) of the self-employment tax you pay on line 27 of your Form 1040, regardless of whether you itemize or take the standard deduction.
Example: Annie Agent, a single Washington D.C. based realtor, took home $400,000 in commissions last year net of all business expenses. Annie chose to celebrate her success by moving into a larger home, purchasing a sports car and flying her extended family to Dublin for a reunion. When Annie filed her taxes, her accountant told her that not only did she owe $140,000 thousand of income tax from her commissions, she also owed $28,371 of self-employment tax. Unfortunately, Annie had already spent all of her money and ended up paying penalties and interest on all of her unpaid taxes for the next two years while she worked hard to make enough money to pay down her balance.
Where to Take It: Line 57 of 1040. Must complete and attach Schedule 1040 SE.
Building relationships with your employees, contractors, vendors, advisors, competitors, etc. is key to being a successful entrepreneur. Often times, entertaining the aforementioned parties can help you win business, expand your network and show your appreciation for those you work with. The IRS considers entertainment costs as an ordinary and necessary part of doing business. Accordingly, your qualifying entertainment expenses may be 50%, or in some cases 100%, deductible.
Example: Abel is a real estate agent trying to close a deal with a new client. His client is a very busy woman who rarely makes time for anything in her life except baseball, so Abel bought two tickets to a National’s baseball game, knowing that she wouldn’t be able to resist the invitation. All in all he spent $440 dollars, which included the face value of premium tickets, food and drinks. During the game, Abel was finally able to convince his client to accept the outstanding offer on her home. Since the purpose of his entertainment was directly related to business, he will be able to deduct $220 (50%) on line 24b of his Schedule C. If Abel decided to go all out and rent a suite at the baseball stadium, where he hosted multiple clients for a promotional event, then 100% of the cost would be deductible.
Where to Take It: Line 24b on Schedule C.
Conventions, Seminars, and Trade Shows
Many real estate agents regularly attend industry trade shows, conferences and seminars both near and far to support their business. These events allow agents an opportunity to network with other entrepreneurs, vendors and industry leaders, not to mention stay on top of the latest technology, innovation and thinking. Often times these events have a high price tag, but it is important to remember that if the event you attend serves a legitimate purpose, its cost may be deductible on your taxes.
Example: Sam is a real estate agent who is working on developing a proprietary application for his clients to use that will aggregate information about all of his listings. Last year Sam had his concept figured out but was struggling to get his application to work as intended. To overcome this dilemma, Sam attended a Techcrunch conference where he was able to listen to experts discuss how to solve similar problems and network with full-time mobile developers. Even though this conference wasn’t directly related to real estate, Sam will be able to deduct the cost of this event on his Schedule C since the event served a business purpose.
Where to Take It: Line 27a on Schedule C (from total calculated on Line 48).
Education and Training
If you take classes or training courses to further your professional education you may be eligible to deduct your tuition, related course materials and certain travel costs. There are a number requirements you must meet to be able to deduct your education expenses, however, the most important points for sole proprietors to take note of are that your training and education cannot qualify you for a different trade or business, they cannot be for the purpose of meeting minimum educational requirements, and they must maintain or improve the skills required in your field. Real estate agents can deduct qualifying education expenses on their Schedule C or E. Employees may be eligible to deduct unreimbursed training and education expenses on their Schedule A, subject to the 2% limit.
Example: Angel is a self-employed real estate agent who has been in the business for over 20 years. The state requires him to complete 20 hours of continuing education courses every 12 months to maintain his license. Last year he spent $350 to meet his CPE requirements. Since he already had met the minimum educational requirements of his profession (original license), the course he took was to maintain and improve his real estate skills and it did not qualify him for a new trade or business, the full $350 would be deductible on line 27a of his Schedule C.
Where to Take It: Line 27a on Schedule C (from total calculated on Line 48).
Office space can be one of the highest overhead costs a real estate agent incurs. Whether you rent space in a commercial building or work from home, the costs to house your business operations may be deductible and they can quickly add up.
Example: Danny is a real estate agent in Las Vegas, Nevada who owns a brokerage and has two employees working under him. Danny pays $1,500 per month for 500 square feet of office space in an executive office park. If Danny’s business occupied the office space for the full 12 months last year, he could deduct $18,000 for his office rent on line 20b of his Schedule C.
Where to Take It: Line 20b on Schedule C.
Being a successful real estate agent often times requires that you participate in some out-of-office professional group activities to help further your business goals. If you incur costs throughout the year to be part of a trade group, professional organization, business league, public service organization, board, etc. these could all be considered deductible business expenses.
Example: Harold is a San Antonio-based real estate agent who is an avid carpenter in his spare time. Harold joined the San Antonio Woodworkers meetup group to hone his skills and meet local professionals. Harold always makes a point to discuss real estate with other members and construction professionals while at Woodworkers events. Harold can deduct any fees he incurred attending these meetings as member dues on line 27 of his Schedule C.
Where to Take It: Line 27a on Schedule C (from total calculated on Line 48).
In addition to paying for rent, furniture and other fixed office expenses, many real estate agents also incur miscellaneous expenses like printing and postage. Even though miscellaneous office expenses are typically low value, over the course of the year these costs can add up. Since these expenses are an ordinary and necessary part of operating your business they are deductible on your Schedule C and should not be overlooked when you prepare your taxes.
Example: Francesca is a real estate agent who has a qualifying home office. Last year, $500 of her home operating costs could be attributed to her office. She also spent $600 on ink, paper, folders, pencils, paper clips, a paper shredder and a calculator. Francesca notified her accountant she wanted to deduct $1,100 for her home office ($500+$600). Luckily for Francesca, her CPA has an eye for detail and notified her that she would need to deduct the $600 spent on miscellaneous office supplies separately as an office expense, rather than include them as part of her home office deduction.
Where to Take It: Line 18 of Schedule C.
Tax Preparation Fees
Preparing your tax return can be complicated, especially if you are trying to maximize your business and personal deductions while ensuring you are in compliance with all federal and state laws. Many entrepreneurs choose to outsource their tax preparation to a professional who understands the rules and knows what landmines to avoid. Depending on how complicated your real estate business is, tax preparation fees can be anywhere from $400 to $4,000 and beyond. Fortunately these costs are usually deductible on your Schedule C, Schedule E or other relevant business return.
Example: Luis is an independent real estate agent who manages his own brokerage. Last year Luis closed a handful of complicated deals so in March he sat down with his accountant to understand the tax implications. Luis’ accountant is the best, and accordingly charged Luis $2,800 for the tax preparation fees. Next year when he files his return for the current year he will be able to deduct the $2,800 that he paid to his accountant on line 17 of his Schedule C.
Where to Take It: Line 17 on Schedule C.
State and Local Income Tax
In addition to paying federal income taxes, you may also be subject to paying state and local income taxes on the earnings from your real estate commissions. Typically, state income taxes are imposed by the state or local government in the jurisdiction you live or are selling in. The good news is that the IRS allows you to deduct these taxes when you prepare your federal tax return, which may be applicable for both business owners and employees, the only difference being where you claim the deduction.
Example: Philip is a successful real estate agent based in San Diego, California. Throughout the year he made estimated state tax payments on his commission income totaling $4,000. When Philip prepares his Federal taxes in April of the following year, if he itemizes his deductions he could deduct the $4,000 of California taxes he paid during the prior year. Note that this is a personal Schedule A deduction for Philip, not a business Schedule C deduction.
Where to Take It: Line 23 of Schedule C.
Self-Employed Health Insurance Deduction
Being a self-employed agent has it’s benefits, but it also comes with some additional responsibilities, one of which is finding your own health insurance coverage and paying the premiums. Fortunately, the health insurance premiums you pay for yourself and your family may be deductible if you are a Schedule C filer and your real estate business had a net profit for the year, you are a partner with net earnings from self employment, you calculated your net earnings using an optional method on Schedule SE, or you own 2% or more of the shares in an S corp you received wages from. If you meet any of the aforementioned descriptions, the premiums you paid for you and your family generally are deductible on line 29 of Form 1040, NOT on your Schedule C.
Example: Megan is a 28 year-old Portland, Oregon based independent real estate agent. In 2016 Megan earned $98,000 of commission income and had net profit from her business of $80,000. Megan paid $2,400 for health insurance during the year. Since her net profit exceeds the amount she spent on health care coverage, Megan would deduct the $2,400 she spent on health insurance during 2016 on line 29 of her Form 1040.
Where to Take It: Line 29 of Schedule 1040 (Not Schedule C).