Since most real estate agents will get paid 100% in commissions, it can be difficult to deal with taxes. They won’t be taken out of your paycheck like with other jogs. Instead, you’re considered self-employed or a sole proprietor.
With this type of status, you will need to self-pay your taxes and handle your taxes each year. It’s important to know what to expect at tax time. Most agents will pay quarterly taxes and file during tax time every year.
While you will need to pay taxes on your own, you will also get write-offs and tax deductions. If you’re a new real estate agent, you should understand how to handle taxes. There are online classes you can take for real estate agent taxes. Let’s also look at some of the best tax tips for real estate agents.
10 Tax Tips for Real Estate Agents to Consider
1. Mileage is a Big Deduction
Real estate agents will spend quite a bit of time driving. They can deduct the mileage they drive every single year. Make sure you track your mileage properly and use this tax deduction when you file.
You will drive around to place for-sale signs, show properties, run errands, and so much more. Mileage can add up pretty fast and give you a big tax deduction every single year.
Tracking your mileage can be pretty easy. There are apps you can use to make tracking your mileage super easy. Some of the top options include:
- Everlance– A free app with a yearly upgraded plan that will track your business expenses, including mileage.
- TripLog– Offers a free option and a $5 per month option with mileage tracking.
- MileIQ– Another free app with a yearly upgrade that will help you track your mileage.
- QuickBooks Self-Employed– You can also use QuickBooks to track your mileage and much more.
These apps can make it much easier to track your mileage for taxes as a real estate agent.
2. Hire an Accountant
Most real estate agents will benefit from using an accountant. Since you will be reporting your income and expenses with IRS Form 1404, Schedule C, it can be beneficial to hire an accountant. This form will require you to report your profit and loss for your business and has many categories for expenses.
Accountants know how to get you the correct write-offs and tax deductions. They can help keep an eye on your taxes throughout the year and provide you with the right advice. Some accountants may even specialize in real estate agent taxes.
3. Keep Accurate Records
One of the key things you need to do for taxes is to keep accurate records. A box of receipts won’t make it easy to do your taxes when that time rolls around. Instead, keep good records and have an electronic backup.
Make sure you keep track of everything from the cost of your smartphone to the miles you drive. Some items are fully tax-deductible, while for others, you can get a partial deduction. With accurate records, it becomes easier to get the right deductions are a real estate agent.
4. Know Your Deductions
As a real estate agent, just about anything you spend money on for your business can be deducted from your taxes. There are many tax breaks you get. The list can be rather long, but some of the common expenses you can deduct include:
- Business Cards
- Signage
- Appraisal Fees
- Escrow Fees
- Vehicle Expenses
- Real Estate Courses
- Professional Dues
- Office Supplies
- Rent
- Utilities
- Postage
- Printing
Many other expenses can be deducted, including meals with clients, too. While not every option will provide a 100% deduction, you should track all your expenses for tax season.
5. Don’t Forget Quarterly Taxes
Sometimes, real estate agents forget about quarterly taxes, which can be an issue. You want to keep these in mind when figuring out your tax strategy. Paying your taxes on a quarterly basis will help make filing your taxes much easier at the end of the year.
6. Don’t Forget About Retirement
Real estate agents have to handle their own retirement savings. If you allocate some of your income to a retirement account, you can do this tax-free. This can be done to ensure you have money for retirement but also to help protect some of your income.
When it comes to your taxes, don’t forget about your retirement savings. Use this as a way to protect your income, but make sure you speak with a tax expert for details on how to do it properly.
7. Pay Your Taxes On Time
When you miss tax deadlines, the penalty can be as much as 5%. This can add up and can cost you in the long run. Make sure you file and pay your taxes on time.
The IRS might allow you to use a payment plan to pay your entire tax bill, but you cannot be late. Penalties can eat into your income if you’re late.
8. Pay Close Attention When Expensing Gifts
When you’re in real estate, you might receive a gift from a client from time to time. You may also buy gifts for real estate clients, which can be expensive. When this is the case, you have to know that you can only deduct a certain amount per person each year for a gift. If you buy something expensive, you might not be able to claim it as an expense on your taxes.
According to IRS guidelines, real estate agents can deduct the cost of business gifts up to $25 per recipient per year. This means that if an agent gives a gift worth $25 or less to each of their clients, the cost of the gifts is tax deductible. However, the excess amount is not deductible if the gift costs more than $25.
Make sure you understand the limits before you start buying gifts. If you receive gifts, make sure you understand those implications, too.
9. Know How to Classify Those People on Your Team
With many agents, this isn’t an issue, but if you have a team working for you, it’s important to know how they are classified. Are they W-2 employees or 1099 independent contractors? If you are paying commissions, 1099 is more common. However, if it’s your office support staff, a W-2 employee is more common.
This is important to understand, as the way you classify those on your team will impact your taxes.
10. Extensions Can Help
Everybody can file for a six-month extension every single year. This can allow you to file your taxes later without a penalty. If you cannot get your taxes done on time, file for an extension.
It might be prudent to do this if the beginning of the year is busy for you. Maybe filing for an extension allows you to handle your taxes during a slower time of the year for your real estate business. Either way, be aware that you can use an extension to avoid penalties when necessary.
Frequently Asked Questions About Real Estate Agent Taxes
How will the PATH Act impact my taxes?
The Protecting Americans from Tax Hikes Act (PATH) gives you some relief when it comes to business-related purchases as a real estate agent or broker. It makes changes to the Section 179 deduction from the IRS. The act came about in 2015 and allows you to immediately deduct a larger amount of a purchase to save more at tax time.
For example, you can write off up to $25K when purchasing a new car for the tax you when you purchased it. This won’t work for all vehicles, but it can provide you with a nice tax break.
Will I be an employee as a real estate agent?
No. Most real estate agents are classified as sole proprietors of a business. They are not an employee, even though an agent has to have a sponsoring broker.
Can I deduct my continuing education courses and other training courses?
Yes, when you take courses to gain continuing education credits, the cost of those courses is deductible from your taxes. Other training courses can also be deducted as long as they are related to your real estate business.
Will I be able to deduct license renewal fees?
Yes, when you become a real estate agent, your pre-licensing courses, application cost, and licensing fees are all tax-deductible. You can also deduct your license renewal fee every single time you have to pay it.
Along with license fees, you can deduct dues you might pay to the National Association of Realtors or another professional organization. It’s best to sit down with a tax expert and get a full list of what you can deduct from your taxes as a real estate agent.
When you decide to become a real estate agent, you will be responsible for much more than a regular employee would be responsible for. This includes handling your taxes. Many agents will do this on their own with a program, such as Turbo Tax. However, you can also hire an accountant or a tax expert to handle it for you.
No matter how you go about filing your taxes, you want to know what to expect. These tips can help you with your taxes as a real estate agent. It’s best to get expert advice on this subject to ensure you get the most deductions and pay the least in taxes every single year.
