7 minute read
Running a successful real estate business can offer a lot of great perks. However, taxes as a real estate agent can quickly add up, which can make managing finances and paying taxes a heavy burden. Luckily, with proper tax planning, there are several tax incentives real estate agents can take advantage of to lower their tax burden and potentially save significant sums of money. Below are 11 of the most common tax incentives that real estate agents can often utilize to lower their tax exposure:
Real estate agents can utilize the home office deduction to deduct a portion of the expenses related to maintaining a home office. Examples include the cost of office furniture, portions of home bills such as water and internet costs, mortgage interest, or insurance. The home office deduction is available for self-employed real estate agents if the home office is used regularly, and exclusively for business purposes.
The IRS also noted that the use of a separate structure not attached to your home, such as a garage used to store equipment will qualify. Different rules may apply depending on how that space is used.
Real estate agents pay a variety of expenses for business needs, and several of these expenses may be eligible as a deduction against the agent’s business income. This could include marketing and advertising expenses— like home staging costs, home sale signage, paid advertisements, photography, videography, business cards, or pamphlets—as well as everyday business expenses such as maintaining a website, social media usage, or renewing a business license. Additionally, any fees for professional services—such as an accountant, lawyer, tax advisor, or other consultant —can be deducted so long as the work done by the professional is related to the business.
Expenses incurred from any training, coaching, or other courses for the real estate agent’s business can be deducted. Fees that are deductible may include registration costs and the cost of the materials required for the training.
To qualify for this deduction, the expenses for education must either (1) be required by law or regulation or (2) assist in maintaining or improving skills related to the current, existing business (new businesses, trades, or professions do not qualify).
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Real estate agents can deduct the costs of all dues and fees related to professional licensing, memberships, and similar costs. This can include MLS dues, state license renewal costs, and so on. Notably, dues paid for a professional membership that are attributable to political advocacy or lobbying cannot be used as a deduction on the agent’s taxes.
Any commissions paid out to other agents and/or employees working under the real estate agent are fully deductible as business expenses, so long as they are ordinary and reasonable.
Real estate agents can deduct travel expenses when out-of-town for business purposes on necessities like a hotel, airfare, and up to 50% of food expenses.
Agents may also deduct the cost of a meal if it has a business purpose. In general, this is also limited to 50% of the total meal expenses. Tax years beginning January 1, 2021 through December 31, 2022 are an exception. Businesses are able to claim 100% of their food and beverage expenses paid to restaurants so long as the business owner or an employee is present at the restaurant when the food is served and the expense is not extravagant or unreasonable.
Any insurance a real estate agent purchases solely for their business is deductible. Examples might include real property insurance for a business property or liability insurance for the business.
Real estate agents often utilize software to help them find business leads; list properties; and provide employees, clients, and prospective clients a portal to access necessary information. These types of tools used to help the business succeed are deductible.
Depending on the structure of their business, real estate agents may also be able to successfully save on their taxes. Businesses commonly operate under one of the following entity structures: sole proprietorship, S Corporation, C Corporation, partnership, or limited liability company. Pass-through business owners who provide “personal services,” including real estate agent services, are eligible (if certain requirements are met) to deduct up to 20% of their net qualified business income from their income taxes.
Choosing an entity structure can have a significant impact on your business and your taxes. Consulting a tax advisor can help a business owner determine which structure is best for them and which offers the most tax benefits.
Real estate experts in the business of buying and selling investment property for themselves may be able to benefit from a tax-deferred like-kind exchange, also known as a 1031 exchange. Under a like-kind exchange, a real estate agent can sell properties that they hold in their inventory without paying any taxes from the sale of the home. Instead, the gain subject to tax is deferred until the new home is sold. These types of exchanges are subject to several strict requirements and real estate agents should consult with their tax advisors to confirm the requirements are met.
Like-kind exchanges can be a powerful tax saving strategy for real estate investors.
Real estate rental property losses may be deducted if you meet the requirements of a “real estate professional” outlined by the IRS. You do not necessarily need to be a real estate agent to be considered a real estate professional. To qualify as a “real estate professional,” the following criteria must be met:
This is what’s known as material participation because the agent – per the real estate professional requirements – is actively involved in the real estate industry. The opposite, passive activity, occurs when real estate agents or professionals do not materially participate. Examples include not participating in the trade or business activities of real estate or neglecting to meet the previously mentioned requirements.
For the most part passive activity loss rules state that passive activity losses can only be deducted from income generated by passive activity. However, if a person or agent qualifies as a real estate professional, they can write off losses incurred on their rental properties against their ordinary income which lowers their taxable income, and therefore saving money.
As evidenced, there are many different types of deductions that real estate agents can benefit from to reduce their tax exposure. By keeping diligent records of expenses and reviewing the different deductions, credits, and other benefits available to the agent, you can save huge sums of money on your taxes. Request a demo from Corvee today!
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