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Tax Tips for Real Estate Agents LifeBack Tax
Many real estate professionals are treated as self-employed for federal tax purposes, whether they are independent broker-agents or work for a real estate agency. Licensed agents are typically paid by commission instead of a fixed salary, and may be statutorily classified as 1099 contractors by the IRS. (Note that this only applies to federal taxes; some states, such as California, require real estate agents to be classified as employees for state tax purposes.) This means that they do not have tax withholding, and must instead pay income and self-employment taxes each quarter. As self-employed individuals, real estate agents and brokers are allowed to claim various deductible business expenses to reduce how much they owe in taxes each year.
Vehicle Expenses: One of the most important tax breaks for a real estate agent is deducting vehicle expenses. A standard mileage deduction reduces your taxable income based on the number of miles driven for business purposes, including meeting with clients, showing properties, attending conferences, collecting documents, etc. For 2019, the standard mileage rate is set at 58 cents per business mile. Alternatively, you may deduct vehicle expenses based on actual expenses. This involves totaling up your vehicle's operating costs during the year, including gas, oil changes, registration fees, auto insurance, and payments toward a leased or newly purchased car, then multiplying the total by the percentage of miles driven for business reasons.
Home Office Expenses: Real estate professionals who primarily work from their homes may be able to claim a home office deduction. In order to deduct home expenses, part of your home must be used exclusively and regularly for business activities, so your couch or dining table do not count as a home office. A "simplified" home office deduction reduces your taxable income based on the size of your dedicated workspace at a rate of $5 per square foot, up to 300 square feet maximum. You may also calculate your home office deduction using the "regular" method. This involves adding up maintenance, utility bills, repairs, mortgage, insurance, and other home expenses, then multiplying the total by the percentage of square footage reserved for business use.
Professional Fees: Real estate agents and brokers may take deductions on various costs that are necessary to their profession. These include licensing and renewal fees, association membership dues, franchise fees, and multiple listing service (MLS) fees, among others. Training and continuing education costs, including related traveling expenses, may also be tax deductible. Agents may deduct any brokerage desk fees in place of claiming a home office deduction. Brokers who run their own firms may claim deductions on commissions paid to other agents, as well as wages paid to any employees.
Marketing Expenses: As business owners, real estate agents depend on marketing tactics to promote their listings and draw in customers. Costs related to advertising such as lawn signs, flyers, business cards, newspaper ads, billboards, radio or television commercials, or website development are all fully deductible as business expenses. When you send gifts to clients after closing a sale, gifts are partially deductible for up to $25 per gift. Note that entertainment expenses are no longer deductible.
Other Operating Expenses: You may claim a deduction on purchases of equipment and office supplies used for your business. These not only include stationery and postage, but also furniture, computers, cell phones, copier machines, software needed to run your business, and other expenses that can be considered "ordinary and necessary" for your business. If you use your cell phone for both work and personal reasons, your phone bill is only deductible for business usage. These expenses are separate from home office expenses, and may be claimed even if you do not qualify for a home office deduction.
If you are a real estate agent or broker, we at LifeBack Tax Relief can provide assistance with your taxes. Many agents and brokers do not take advantage of all the tax breaks available to them. Should you find yourself in conflict with the IRS, please contact us right away. We are committed to defending you as a business owner, and our tax experts will negotiate with the IRS on your behalf.
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