Most real estate agents are independent contractors instead of employees. Because of this, they receive a Form 1099 from their broker instead of a Form W-2, and they're treated as sole proprietorships by the Internal Revenue Service. Operating as a small business, real estate agents have a large number of deductions available to them that most employees do not have, and an effective tax strategy can yield significant savings.
Schedule C and Normal Business Expenses
Real estate agents usually report their income and expenses on IRS Form 1040, Schedule C, which is for reporting profit and loss from a business. Schedule C lists a wide range of categories of expenses, and also offers an "Other expenses" section where you can write off just about any cost you incur. Generally speaking, the IRS will let you expense any "ordinary and necessary" item. This can include items such as commission splits, desk fees, printing, advertising, and staff costs. It's a good idea to discuss what you can deduct with an accountant to ensure that you don't miss anything, and that all you do claim is allowed.
Meals and Entertainment
The IRS lets you write off one half of the cost for your business meals and entertainment. Those can go well beyond taking a client out to dinner. Working lunches during property tours are tax-deductible, as are get-togethers with colleagues where you discuss your business and the state of the real estate market. To substantiate your deductions, save the receipts, and keep notes about who attended a meal or event with you and what was discussed.
Every non-commuting mile you drive for your real estate agency business is tax deductible. The IRS gives you a choice between tracking your actual car expenses and deducting them, or claiming a flat rate per mile, which requires much less recordkeeping. At 56.5 cents per mile as of 2013, the flat rate can add up very quickly given how much many real estate agents drive.
The IRS lets you deduct business gifts as well. You can write off up to $25 per person per gift. If you sell a house to a family of three, any gift up to $75 will be tax deductible. There is a way around this limitation, though. Instead of buying a gift, reduce your commission by the amount that will buy them their first year's home warranty. Reducing your commission isn't considered a gift, and, without limit, reduces your taxable income. If you do this, you must disclose the commission credit that you give to all parties in the transaction.
If you maintain an office for your real estate business in your home, you can write off all of its expenses. These include the cost of dedicated phone lines for the home office, any supplies or furniture you buy, and a pro-rata share of your house's other expenses. The IRS also lets you depreciate your home office, further reducing your taxes. To be able to claim the home office deduction, your home office must be your primary place of business. If you have an office at your brokerage it is especially important to talk with an accountant to ensure that you are allowed to claim your home office as well.
"Dual Use" Expenses
If you get creative, you can let your business expenses help to defray the cost of your personal life. Claiming a deduction for business miles that you drive on your personal car or writing off the business-use percentage of your cell phone are both examples of this. They're legitimate deductions for your business that have the effect of helping to defray some of the costs of items you use in your personal life. You can also do this with travel. For instance, if you travel to a convention in New York for your business, you can stay a couple of extra days for leisure. While you can't write off the cost of your leisure stay, you can deduct the cost of your plane tickets and the cost of your business nights and meals. If you're having trouble visualizing how you can use these strategies to legally reduce your taxes, an experienced accountant can give you guidance.
- IRS: Schedule C - Form 1040
- Fox Business: Allowed Business Expenses: Learn From Other’s Mistakes
- IRS: Publication 463 - Travel, Entertainment, Gift, and Car Expenses
- IRS: Standard Mileage Rates for 2013
- Real Estate Coach: "Strategies to 'Up' Your Deductions"
- IRS: Home Office Deduction
- SmartMoney: Deducting Travel Expenses When Business Mixes With Pleasure
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