6 Essential Tax Deductions for Real Estate Agents + a BONUS Deduction
Commissions are hard-won, especially in a volatile market, and for real estate agents trying to grow, holding onto every cent of revenue is critical. The first place an agent should start isn’t putting in more hours, hiring more staff, or even adding more marketing. It’s by reducing taxes owed (liabilities) by maximizing all available deductions. However, understanding what can and can’t be deducted can be confusing, and making mistakes often lead to costly penalties and interest charges.
Quick refresher on tax deductions: real estate agents must pay taxes on the money they earn. A deduction is an expense that reduces the amount of money that an agent earns. The less money earned, the lower the tax bill. For example, an agent earned $100,000 in 2022. Let’s say that the adjusted tax rate is 15% for that agent. This means that the agent owes $15,000 in taxes for 2022. Now let’s say that the agent spent $50,000 of those earnings on deductible business expenses. That reduces the agent’s earnings from $100,000 to $50,000 in the eyes of the IRS. So instead of paying $15,000, that agent only owes $7,500. By maximizing the deductions for what the agent was already spending, the agent in this example cut their tax bill in half.
While every agent’s business is a little bit different, there are 6 essential tax deductions that real estate agents need to know in order to save thousands in taxes and avoid costly mistakes:
1. Home Office Deduction
Arguably a real estate agent’s most important deduction is the home office deduction. If an agent has a designated space in their home that’s used exclusively for business purposes, then a portion of their home-related expenses can likely be deducted. This includes everything from mortgage interest and property taxes to utilities (including internet) and insurance. To qualify for this deduction, the space must be used regularly and exclusively for the agent’s business. Also, it must be the agent’s principal place of business or a place where the agent meets clients or customers.
When it comes to calculating the home office deduction, there are two methods: the simplified method and the regular method. The simplified method allows an agent to deduct $5 per square foot of their home office, with a maximum of 300 square feet. The regular method is calculated based on the percentage of the home’s square footage that is used for business.
For example, if an agent’s home office is 8x8 (64 sqft) and the entire house is 1,280 sqft, then the home office is 5% of the home's total square footage. This means that the agent can deduct 5% of their home’s internet, power, water, insurance, property taxes, etc. as a business expense. This deduction can add up quickly, especially with larger homes and more expensive area markets.
It's important to keep detailed records of these expenses throughout the year to ensure the correct amount gets deducted. Also, there are specific rules and limitations around this deduction so it's important to consult with a CPA to ensure that deductions are accurately calculated.
2. Education and Training Expenses
Continuing education and training are not just required to maintain a real estate license, they’re essential for staying current with industry trends and regulations. Fortunately, these expenses are also deductible. This includes seminar and conference fees, travel expenses related to attending training events, e-learning, coaching, and the cost of continuing education courses.
The caveat is that the classes and seminars must be directly related to an agent’s business and they need to improve skills or knowledge. An agent spending $3,000 on a real estate coaching program, $400 on a NAR summit, and $2,000 on a graphic design course can only expect to deduct $3,400 as a business expense as graphic design wouldn’t tie directly to the real estate agent’s business.
3. Mileage & Vehicle Expenses
Especially during busy season, real estate agents live on the road, showing properties to clients, attending open houses, and meeting with other agents to get the deal done. Racking up the miles also means agents have to pay for gas, oil changes, repairs, insurance, and more. Fortunately, mileage and vehicle expenses are deductible, which can quickly add up significant tax savings.
There are two methods to calculate the travel expense deductions: the actual expense method and the standard mileage rate method. The actual expense method is as straightforward as it sounds: keep all receipts pertaining to business travel and vehicle maintenance then deduct the total. (For busier real estate agents, getting a bookkeeper to keep track of all the paperwork can sometimes pay for itself)
The standard method is simpler and uses a flat mileage rate. The standard mileage rate for 2023 is 65.5 cents/mile, however this rate can, and does, change from year to year. This means that driving 10,000 miles for business purposes results in a $6,550 deduction. Like the actual expense method, real estate agents should keep detailed records of their mileage and expenses to accurately calculate their deductions.
4. Travel Expenses
Beyond simple mileage and vehicle maintenance, real estate agents that travel for business can deduct those related expenses including airfare, hotel accommodations, and meals. The catch is that only "ordinary and necessary" expenses qualify.
For example, if an agent attends a real estate conference in Las Vegas, they can deduct their airfare, hotel accommodations, and meals during the conference. However, if the agent decides to extend their stay for a few days and go sightseeing, those additional expenses are not eligible.
Additionally, agents entertaining clients or customers for business purposes may deduct a portion of the meals and entertainment expenses. The deduction is generally limited to 50% of the cost and must be directly business related.
5. Marketing and Advertising Expenses
Marketing and advertising are some of the greatest tools and the biggest expenses for real estate agents. Everything from website design, business cards, brochures, and social media advertising to print advertisements, flyers, and other promotional materials can drive new clients and more closings.
While these expenses can be significant, they’re also deductible. An agent spending $2,000 on website design, $1,500 on social media advertising, $1,200 on a listing site, and $4,000 on flyers, is looking at $8,700 in deductible business expenses.
This deduction isn’t just related to marketing materials either. Subscriptions to HomeBot, LoopNet, and any other marketing- or sales- related tool qualify as deductible, marketing-related expenses.
6. Equipment and Supplies
Like the home office deduction, running a real estate business requires equipment and supplies such as a laptop, smartphone, printer, office supplies, etc. Fortunately, these business expenses are not just deductible, many can also be depreciated over the useful life of the property. This allows agents to recover the cost of the property over time.
Taking advantage of these tax deductions requires real estate agents to keep detailed and accurate records and receipts related to all business expenses throughout the year. This includes logging mileage, home office expenses, advertising and marketing expenses, travel expenses, education and training expenses, and insurance premiums. Many agents elect to use a bookkeeper and accounting software to reduce headaches by keeping track of expenses and receipts. Some popular software options include QuickBooks, FreshBooks, and Xero.
It's also a good idea to consult with a CPA who specializes in working with real estate agents. They can help navigate the complex tax laws and ensure that no deductions are missed.
BONUS DEDUCTION : Professional Services
Business coaches, marketing consultants, attorneys, and even bookkeepers and real estate CPAs are all deductible business expenses. As long as the contracted services are reasonable, necessary, and help an agent run their business, the expenses can be deducted on the agent’s tax return. That means that consulting a real estate CPA with additional questions about tax deductions can potentially pay for itself in deductions.
Maximizing deductions is an easy way for real estate agents to reduce tax liabilities and to hold onto every hard-earned commission dollar. By keeping detailed expense records and consulting with a CPA, real estate agents can ensure that they're doing everything they can to grow their real estate business.
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