Working in real estate is definitely a job that comes with a lot of great perks – schedule flexibility, great income potential, and the ability to help people find their forever homes.
But being a busy, self-employed, agent has a big drawback – having to track all your own business expenses for tax purposes. Paying for office supplies, advertising costs, fees to professional associations (like NAR), the cost of staging homes, list service fees, business meals, business gifts, continuing education courses, purchasing software programs, travel costs, etc. The list goes on and on.
Fortunately from a tax perspective, many of these expenses can be tax “write-offs”. To put it simply: If you purchase something that was either required for your business or necessary to do your job, it may be a tax deduction (see IRS Publication 535). Deductions lower your taxable income.
To help you keep more money in your pocket at tax time, here are 11 of the top tax deductions for real estate agents.
1. Commissions and Referral Fees Paid to Others
Commissions and commission splits a real estate agent pays to other agents are tax deductible. In addition, an agent can deduct fees paid to another agent for a client referral. Commission splits and referral fees can result in some significant tax deductions.
2. Auto Expenses
From going to showing after showing, and clients meetings and lunches, agents travel a lot. Daily. Keeping track of all of those miles and expenses you’re putting on your private vehicle will play a huge role in maximizing your tax deductions.
This can be done in one of two ways – but both require that you keep a log of all the miles you have driven (personal vs. business) either manually (a big headache) or via an automatic, miles tracking app like Confetti: Easy Tax Deductions.
Actual Expense Method
If you’re good at record keeping, then you could keep track of all of your vehicle expenses (gas, oil changes, maintenance, etc.) and deduct a portion of them for your business. Your deduction would equal these costs multipled by the percentage of your total annual miles that were for business (vs. personal). You can also deduct other expenses like parking and tolls if you had to pay these are part of your business travels.
Standard Mileage Method
If you do not want to keep track of all your vehicle expenses, the IRS does offer a simpler method where you just deduct $0.575 for every business-related mile you traveled (but note, the rate for driving for charitable and medical purposes is a different rate). Again, this is based on the percentage of your total annual miles that were for business (vs. personal).
A helpful tip from the Overnight Accountant: If you work from home and go directly to showings, this will help to keep the miles on your car down while maximizing your tax deduction. If you work at an office and drive there from your house, then this part of your travel is considered “commuting” and does not count as a deduction.
3. Your Workspace
Unlike traditional employees, since real estate agents are considered self-employed, “where” they work can also be considered a tax deduction. Here are three of the most typical arrangements and how it can influence your tax situation.
If you work at a real estate franchise (such as RE/MAX or Century 21) that already has an established office space, then you’re likely being charged a “desk fee” to work at that location. If so, then this desk fee is tax deductible.
Some real estate agents prefer to lease their own office space. When you do this, it can be a huge tax write-off for your business.
Typically, you can deduct the:
- Real estate taxes
- Cleaning and maintenance expenses
In addition, if you’ve made any improvements to your leased space, then this will also be considered tax deducible. However, it should be depreciated over the years that you will occupy the space.
If you work out of your home, then the space that you use for your office can be considered deductible. Agents can typically choose from one of two methods:
- Actual expense method: Calculate the percentage of your house that your home office takes up and multiply it times your annual expenses for the year (mortgage interest, insurance, taxes, utilities, etc.)
- Simplified deduction: Multiply the square footage of your workspace (up to 300 square feet) by the standard rate of $5.
But keep in mind that this home office has to be considered a “dedicated” area specifically for your business. For example, you can’t claim your dining room is a home office even if that’s where you typically work.
4. Marketing and Advertising
Marketing is an integral part of the real estate business. According to the site REAL Trends, while the majority (53%) of real estate professionals spend less than $5,000 on their annual marketing efforts, some go as high as +$80,000. No matter what you usually spend, as long as it was tied to conducting real estate business, then it can be considered a deductible expense. This includes things like business cards, online marketing, hiring someone to design your logo or website, maintaining your own website, sponsoring events, printed flyers, staging and photographing homes (including virtual staging), putting out “For Sale” signs, etc.
If you like adding a personal touch to your service by giving your clients house-warming gifts when they move into their new home, then you’re in luck with the IRS. You are allowed a $25 gift deduction per person, per year. For example, if you buy a client a $40 bottle of wine, $25 of that $40 will be deductible. Certain gifts that are not tangible, such as tickets to a Beyonce concert you will attend with your client, are non-deductible (and as of 2017, there is no longer an “entertainment” deduction). In addition, if you have employees, cash or giftcards may constitute “income” and be subject to different rules.
6. Business Meals
Just like any other professional business person, real estate agents sometimes use dinning out to entertain clients or discuss important business topics with other professionals. When you do this, you’re allowed to deduct 50 percent of the total expense, which includes tax and tip for the meal, provided that:
- You are present for the meal and beverages;
- The cost of the meal and beverages is not lavish or extravagant. (The IRS doesn't define what constitutes lavish or extravagant – so you have to use common sense.);
- The meal and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- When food and beverages are provided during an entertainment activity, the cost of the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on a bill, invoice, or receipt.
Legal sites like Nolo will remind you that to stay clean with the IRS, the meals have to be for a legitimate business purpose. For example, eating dinner with a friend who is a colleague is not a business meal simply because you happened to discuss some business. The primary purpose of the meal must be for a business purpose. And also note, treating your clients to sporting events or theater shows can no longer be considered an entertainment deduction.
7. Insurance Premiums
When it comes to insurance, there are generally two major types that real estate agents can deduct from their taxes: (i) business insurance, and (ii) medical/health insurance.
Real estate agents generally have to purchase the following insurance policies to protect their business:
- General liability insurance (GL) - Coverage that protects you from claims including bodily injury, property damage, personal injury, etc.
- Errors and omissions insurance (E&O) – Protection for companies, their workers, and other professionals against claims of inadequate work or negligent actions.
- Both can be considered fully deductible business expenses.
Medical / Health Insurance
If you aren’t already receiving medical or dental insurance via a spouse or employer, then you’ll also need to purchase a private health insurance policy for yourself and your family. If you do, your monthly premiums would be considered 100 percent deducible.
Note: Health insurance premiums are taken as a personal deduction on Form 1040 and not as a business expense.
8. License and Membership Fees
License and membership fees and dues are another common expense of doing business as a real agent. Typically, these fees will be for things like:
- State license renewal fees
- Real estate broker fees
- National Association of Realtors Membership dues
- Chamber of Commerce dues
- MLS (multiple listing service) access fees
The IRS looks at each of these expenses as being tax deducible. The only portion which is not is any part of your dues which goes towards lobbying and political advocacy.
9. Training and Education
Real estate is an extremely dynamic industry where the regulations and best practices for working with clients are always evolving. As such, real estate agents often to attend various continuing education sessions, trainings, and seminars throughout the year.
You may be able to deduct education related registration fees, learning materials costs, subscriptions to trade publications, purchases of books tailored to your industry, seminars and webinars, and certain transportation and travel costs. But there a few requirements. To be deductible, your expenses must be for education that (1) maintains or improves skills needed in your present work or (2) a law requires to keep your present salary, status or job. However, even if the education meets either of these tests, the education can't be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your present trade or business. Fortunately, the IRS provides a handy online questionnaire to help you determine what work related education expenses are deducible.
Note that this is only for the expenses you incur after you’ve become a real estate agent. If you’re just getting started with a new career as a real estate agent, then your education and license exam expenses are not deducible.
10. Software and Business Tools
With nearly all real estate listings being digital, agents have a huge variety of software and business programs they can use for activities like lead generation, expense tracking, open house schedules, and much more.
Here are just a few examples from more than 40 top recommended programs:
- Zillow Premier Agent (Lead Generation Software)
- RealScout (Lead Nurturing Real Estate Tool)
- CINC (Lead Generation and Conversion Engine)
- Cloud CMA (Comparative Market Analysis Generation)
As a cost of doing business, the IRS considers these programs to be fully tax-deductible. Note that any purchased software programs should be amortized over the life of their expected usage.
11. Office Supplies and Equipment
If you purchase office supplies or equipment, they can also be tax-deductible.
- Office furniture
- Mobile phones and service
- Copiers / fax machine
- General office supplies (paper, envelopes, stamps, etc.)
Anything that will be used for more than one year should be depreciated over the life expectancy of the item to account for wear and tear. For example, cell phones can be depreciated over a seven-year schedule.
Get Organized and Maximize Your Tax Deductions
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As a real estate agent, you’ve got a busy career to manage and probably not a lot of time to sift through piles of receipts each week. And manually logging all of those miles you drive for work is a headache. Things slip through the cracks. You lose time and money.
Hey, we get it! That’s why we developed Confetti, the easiest and most affordable way to maximize your tax deductions.
Confetti was created from the ground up with real estate agents in mind. Our app syncs with your credit cards, checking accounts, and phone's GPS to automatically display your daily purchases and miles traveled. Each purchase or trip shows up as a big ‘Tinder-style’ card. You organize cards into 'business' and 'personal' categories by simply swiping. The more you swipe, the more money you put back in your pocket. And you can download organized, IRS compliant reports. Its that simple.
Average users save between $5,300 and $8,250 annually. Even the cost of the app is tax-deductible.
Interested in trying Confetti? Try your first month on us for free and see how easy it is to start racking up those tax deductions!
--This article is for informational purposes only, and does not constitute professional advice. The information herein is subject to change at any time. Always consult with a tax professional.--