Real estate continues to be an attractive and lucrative industry, with everyone trying to get a slice of the pie. Real estate agents get an opportunity to receive handsome commissions on the sale of any property. Your profits can be diminished, however, if you’re not careful when handling real estate agent taxes. It’s prudent that you track the real estate taxes you pay, whether you’re a novice in the business or a full-fledged agent. This guide will explore the several types of real estate agent taxes, the deductions available to you, and how to claim these deductions.
Types of Real Estate Agents Taxes
Real estate agents can sometimes be classified as employees of an agency, but often they’re independent contractors. This makes a big difference in how they get taxed. Employees have income taxes withheld and paid to the IRS by their companies, but self-employed agents are responsible for filing and paying their taxes. This guide will focus on the independent contractor approach to being a real estate agent since that’s most common. The IRS requires self-employed agents to make payments – at least quarterly, or more often, if you like – that are an estimate of the taxes they expect to owe. The IRS still requires you to adjust the amount of tax when you file your annual income tax returns to determine whether you owe more or are due a refund. You should pay your taxes quarterly if you expect to accrue more than $1,000 in income taxes for the year. This is a low threshold for most real estate agents. Medicare and Social Security taxes are other essential taxes that agents must pay. The IRS publishes annual tax rates that you can use to determine how much you need to pay to cover these requirements.
Tax Deductions That Real Estate Agents Should Not Miss
Real estate agents can incur several expenses in their efforts to woo clients, such as lunch dates with clients or the long drives to various neighborhoods. They also have to market themselves and promote property listings on various platforms. A couple of these expenses are deductible, and it’s best practice to document them throughout the year. Here are a few deductions to keep in mind if you want to shave off some of your real estate agent taxes:
License Renewal and Insurance Fees
Insurance premiums are one of the deductible expenses you should consider to trim your tax bill. Agents typically have some coverage, including professional liability coverage, general liability coverage, and even commercial auto insurance coverage if you use a business car. You can also deduct your health care premiums if you don’t have access to employer-paid insurance coverage. The IRS will also let you deduct expenses on your license renewal fee. Be sure to renew your professional license every year since it’s a tax-deductible expense.
Car Expenses
Some real estate agents use their personal vehicles during work, while others buy a different car for business purposes. You can deduct a certain amount for every mile you drive for business, even if you use your personal vehicle to show clients around. The IRS adjusts that amount every year, and it’s at 56 cents per mile for 2021. Claiming this deduction means documenting every car expense or tracking the mileage you spend showing your house-hunting clients around. There are several smartphone apps designed for this purpose, but you can also do it manually every night. Some of the car expenses that you can get deductions on include car purchase expenses, maintenance and repair, gasoline, and even leasing costs.
Travel Expenses
It’s also important to track your travel expenses from showcasing a property to a client. You can track lodging fees, meals, or any airfare that you use when traveling for business purposes or when attending education seminars.
Home Office Expenses
Those who conduct most of their business in a home office can qualify for a significant home office deduction. You should note, however, that the office space in your home should be fully dedicated to managing your business. The IRS allows deductions even if you have an office at home and another one away from the house, as long as the home office is where you conduct your main business activities. You can deduct $5 per square foot, but the IRS has a limit of 300 square feet. You can also choose to itemize your home office expenses into different office-related expenses. This allows you to deduct a percentage of your property taxes, maintenance expenses, home insurance, and even mortgage interest, among others.
Real Estate Marketing
Marketing is an integral part of real estate, especially if you’re an agent. You need to create business cards, fliers for your houses, brochures, signage, and even holiday cards for your clients. Real estate agents also need to develop a working website, maintain social media campaigns, and promote your listings on various platforms. All of those expenses are eligible for tax deductions, as are expenditures on TV, radio, and internet advertising. Keep this information in mind when creating your advertising budget to maximize those deductions.
Claiming these deductions is as simple as listing them on IRS Schedule A with your tax return. It can be an important part of a real estate’s business plan to make sure they take advantage of every deduction the IRS offers because the savings can be significant. It pays off to do your homework on what is eligible and what isn’t.
Nondeductible Real Estate Expenses
It can be tempting to push the envelope on deductions, but that’s a clear red flag for the IRS to consider an audit. Tax law says taxpayers cannot deduct the following:
- Entertainment-related expenses
- Lobbying expenses
- Club fees
- Political contributions
- Gifts above $25
Tax-deductible expenses should meet three important criteria. You should have paid for the expense with no reimbursements from your real estate brokerage firm. The expense should also be business-related and not a personal expense. You also need to have records of all business expenses you intend to deduct. It can be tricky to sort through the legalities of deducting your real estate business expenses, but when you do so, the savings are real. Consider consulting with a tax professional for help if you’re unsure about what you can deduct.
Let Tax Professionals Help You Maximize Your Deductions
You have worked hard to make your commissions, and you should ensure you claim all deductions available to real estate agents. Silver Tax Group has the tax law knowledge to help you take advantage of every deduction you’re allowed. We also have deep experience in defending clients against any IRS action when needed. Contact our team today to speak to a tax expert about your questions concerning real estate tax deductions.
