A Tax Planning Guide for Real Estate Agents and Brokers
Working as a real estate agent or broker is great. You get the freedom and flexibility of an entrepreneur and often create your own schedule. With an entrepreneur-like position, if you want to succeed, it requires a lot of hard work and dedication. Real estate agents and brokers receive most of their income from commission. This means that technically, under federal tax guidelines, you’re not considered an “employee.” Instead, real estate agents and brokers are considered a self-employed sole proprietor. While you’re likely still employed by an actual firm, you will need to calculate all of your taxes, including expenses and deductions, on your own.
If you’re not well versed in tax planning, this can be difficult. You already have a full-time job, so adding accounting to your to-do list is daunting. To help you better prepare, we’ve put together a tax planning guide for real estate agents and brokers.
Keep a Precise Expense Report Record
First and foremost, keep a precise expense report record throughout the year. Don’t wait until tax season approaches to start. If you do, you’ll likely miss a lot of common deductibles and will end up spending hours going through your receipts and electronic statements to try and catch up. Instead, create an organized filing system and put each receipt in its corresponding location at the end of each day or week. If you have any work-related or even personal deductibles, keep track of them for review at the end of the year. Remember that as a self-employed sole proprietor, you can deduct substantially more than a full-time employee. With that being said, make sure you know all of your deductibles.
Know All Your Deductions
Claiming every deduction you can is the best way to avoid paying thousands of dollars in taxes. Even expenses that seem small will add up and can be counted toward your total yearly deductions. Make sure that you know all of the deductions you can write off as a real estate agent or broker.
Health Care Costs
If you opt to choose your own health care plan for your family, all of the premiums are tax deductible. This can end up saving you money in the long run. If your spouse works, have her abandon the employee-health insurance for a family plan bundle with you. The premium write-offs for family plans are often more beneficial than using employee-health insurance. Medical expenses outside of insurance can also be deducted.
Home Office Deductions
A lot of times, brokers require real estate agents to pay a desk fee, which is deductible. What many agents don’t realize is that if you rent or own a home, you can deduct for an office space. However, you can’t deduct both. This is when you should take some time to consider costs. Whichever one offers the highest tax savings; use that as your deduction. More often than not, it will be the home office deduction.
Section 179 Expensing
Any time you buy business equipment, you can deduct it. As long as the equipment is going to be used for more than a year, it doesn’t matter if you purchase it for your home or in the office as a broker desk. Make sure that you deduct this during the year that you purchase the item to stay compliant with the IRS Code Section 179 Expensing.
To better take advantage of Section 179 Expensing, you can read about the PATH Act, or Protecting Americans from Tax Hikes. This act was initiated to provide more self-employed sole proprietors, like real estate agents and brokers, with additional business-related expense relief.
Transportation expenses add up throughout the year, but as a real estate agent or broker, you need to be able to get around. If you use your car for work, you can deduct any automobile maintenance, repairs, gas, auto insurance, parking, or mileage usage. If you are looking to purchase a new car, you can deduct a percentage of the purchase or lease costs.
If you need to travel out of state, or somewhere that requires additional travel expenses, keep you receipts. Airfare is deductible when used for business purposes or even when furthering your career-related education. You can also deduct any lodging or meals incurred during the time away from your home.
Since real estate agents build their business on marketing skills and referrals, you can write off anything that relates to these two categories. Networking events, flyers, signage, business cards, website development and yearly maintenance fees, and batches of mailers are all deductible. Save your receipts and file them into a combined marketing folder.
Real Estate Costs and Education
Finally, any costs that you incur to get your real estate license or further your career are deductible. If you would like additional coaching or training, it’s deductible. Similarly, you can write off any educational costs. The initial licensing fee for real estate agents is deductible along with any time you need to renew it. Anything related to your career, or the process of becoming an agent or broker, can be written off. If you have any questions about specific expenses, talk to a certified public accountant today.
Form an S Corporation
As we mentioned, real estate agents and brokers are considered self-employed sole proprietors. This means that they need to pay self-employment tax, which can be substantially higher than corporate taxes. If you want to reduce this tax, consider forming an S corporation. Forming an S corporation for your real estate business will give you the chance to protect your assets in a more powerful way and allows you to essentially split up salaries and dividends. All you need to do is meet the necessary requirements and file for a corporation. Then file for a subchapter S corporation and enjoy the perks—primarily saving money.
If you decide to move forward with an S corporation, it’s recommended to have a year-round accountant, either internally or externally. If you make mistakes during your filing, you will end up with an opposite outcome—paying much more in taxes. If you do things correctly, you could end up paying almost half of what you’d owe in taxes as a self-employed sole proprietor. To learn more about forming an S corporation, contact Del Real Tax Group today.
Plan For Retirement
Half of the reason we work so hard when we’re younger is to make sure that we plan accordingly for retirement. To gain the most benefit out of your self-employed sole proprietor title, you should be fully funding each of your retirement plans every year. Contributions to retirement plans are tax-free and will lower your yearly annual income, which could mean a substantial difference between tax brackets.
Getting Some Outside Help
If you’re struggling to keep track of all your businesses expenses and plan for your taxes, you’re not alone. That’s why certified tax coaches and professional CPAs, like the ones at Del Real Tax Group, are here to help. We work with real estate agents and brokers to maximize profits and reduce your taxable income. Our specialized services have helped hundreds of businesses save thousands of dollars in taxes each year. We work hard to help you legally cut your tax bill so you can enjoy more of your hard earned money. To learn more, or to schedule a consultation, call us at 708-788-0082 or fill out our contact form today.
Maribel Del Real, CPA
We perform tax Planning and tax consulting year round. We understand that preparing your own income tax return can be a task that leaves you with more questions than answers. View More