Let’s face it: working as an independent real estate agent has its perks, but tax time is certainly not one of them. This guide will demystify Real Estate Agent tax deductions to help lower your tax bracket. You should also consider utilizing tools that will make it easier to keep track of deductible items throughout the year.
How Much Money You Can Save with Real Estate Agent Tax Deductions
Unfortunately, tax deductions do not reduce your tax liability dollar for dollar. In order to figure out how much your real estate agent tax deductions will save you, you need to multiply your deductions by your tax bracket. Updated tax brackets are published by the IRS in November or December of each year to take effect January 1 of the following year. Download the 2018 tax bracket table to find into which tax bracket you fall.
Let’s say that if you are a single head of household, and you made $100,000 this year, you’ll save around 45.3 cents for each dollar deducted from your taxes. That assumes a 24 percent federal tax, 6 percent in state taxes and 15.3 percent self-employment tax. If your real estate deductions total $10,000, your approximate tax savings would be calculated as follows:
$10,000 x 0.453 = $4,530
Your taxable income would be reduced by $4,530. In our example, let’s assume the $100,000 is your taxable income. That means you would only pay taxes on $95,470 ($100,000 – $4,530).
Be sure to check out our Real Estate Agent Salary guide to see how you match up against the average real estate agent salaries.
25 Top Real Estate Agent Tax Deductions
There are a number of tax write-offs for Real Estate Agents that you may not be aware that you qualify for. I asked Shauna Wekherlien, who owns and operates a tax practice called the Tax Goddess, what is the most common mistake made by self-employed individuals like real estate agents when filing their tax return. Here is what she said:
“Failing to know all the deductions that they are eligible for. Many self-employed people have worked with their tax accountants to go over the basic deductions — home office, cellphone, auto expenses and so on — but not many of them know that you can pay your children, have your company cover your medical expenses or even write off a hot tub as a tax deduction, A certified tax strategist helps a business owner look for all the legal loopholes available to business owners that they aren’t taking advantage of yet because no one showed them.”
— Shauna Wekherlien, CPA, MTax, CTC, CTS, Drop My Taxes
We have created a checklist of our top 25 Real Estate Agent tax deductions that you can download and use on your real estate agent tax deductions worksheet to ensure you don’t miss out on any tax deductions.
Listed below are our top 25 real estate agent tax deductions:
Vehicle Deductions for Real Estate Agents
A modern real estate agent is a road warrior. You may not drive cool cars through the desert, but you live on the road. The better you’re doing, the more mileage you’re going to put on your car. Lucky for you and your poor car, mileage driven for work is tax-deductible. In addition, if you purchase or lease a vehicle, you may qualify for additional tax deductions for Real Estate Agents.
Listed below are two common vehicle tax write-offs for Real Estate Agents:
1. Vehicle Mileage
Every year, the IRS sets a “standard mileage rate” which factors in gas, wear and tear and other expenses associated with driving. For 2018, the mileage rate is 54.5 cents per mile. In order to take the deduction, you simply need to multiply the mileage you put on your car for work by the IRS mileage rate. For example, if you drove 15,000 miles last year for work, your mileage deduction would be $8,175 (.545 cents x 15,000).
The only catch is that in order to claim the deduction, you need to keep a log of your miles.
To make logging miles a snap, the Everlance app will automatically track your business mileage and expenses with auto-categorization. You can download the Everlance app on iOS or Android for free.
2. Buying or Leasing a New Car
This probably won’t surprise many of you, but appearances matter in this industry. This is why having a modern, clean car that fits your personal brand is so important. If you’re working in Colorado, a nice new pickup truck would be fine. If you’re working in Beverly Hills, an entry-level Mercedes would be an embarrassment. Amazingly, buying or leasing a new car is tax-deductible.
While you can deduct the depreciation of a newly purchased car, you can deduct almost your entire monthly payment if you lease a car. That said, many leases have mileage restrictions, which make you pay per mile once you go over a set mileage. Like many things in real estate, there is fierce debate about which is more economical.
Office Deductions for Real Estate Agents
Whether you work out of your garage — that you converted into a nice home office — or you lease a swanky office downtown, you can deduct items purchased for your office. For example, computers, software to run your business, the cost of a virtual assistant, office supplies and your office telephone are just a few of the tax-deductible office expenses you can deduct.
Office deductions a real estate agent can take include:
3. Home Office Deduction
In order to be eligible for the home office deduction, you need to have a dedicated workspace at home that you use only for your real estate business. It also has to be your primary workspace. Setting aside an area of your basement or converting a spare room into an office are both deductible. Unfortunately, you can’t write off your living room just because you occasionally answer emails from your couch.
As far as deductions go there are three ways to write off a home office:
- Indirect expenses: These include a portion of your rent or mortgage payment, utilities and internet.
- Direct expenses: Direct expenses include furniture and equipment, renovations and even paint and decorations.
- Standard home office deduction: In 2017, the standard home office deduction is $5 per square foot with a maximum of 300 square feet written off.
4. The Cost of Real Estate Software and Apps
In order to keep pace with your competition, you’re going to need great software and apps. While the monthly costs for each app can be low, they can add up quickly. If you’re an independent agent, you might be paying for a customer relationship management (CRM) tool, transaction management software, open house software, comparative market analysis (CMA) software, landing pages, websites and so on. Your monthly software bill can top $300 easily. Tax deductions for Real Estate Agents can help soften the blow to your wallet.
You will need to invest in a good accounting software to keep track of all that dough you will be bringing in. Lucky for you, we’ve already done the legwork and found the best real estate accounting software for investors, brokers and real estate agents.
5. Cellphones and Tablets
You can also write off your cellphone and tablets when used for business purposes. You can get a deduction on the monthly service bills as well as the purchase price or depreciation of your devices. If you’re working full-time, you can and should have a separate phone or tablet just for work. If not, you will need to log every second you use the phone for work and can only deduct that amount.
6. Office Supplies
Office supplies like paper, printer ink, pens and staples are all tax-deductible. You can even write off the purchase price of your chair, desk or supplies purchased to paint your office.
7. Virtual Assistants and Bookkeepers
If you’ve been working in the industry for more than a few months, you probably know someone who has a virtual assistant. Believe it or not, hiring an overseas virtual assistant can be very affordable, even for brand new agents. To learn more, check out our in-depth guide on choosing and using a real estate virtual assistant.
If you prefer to focus on your business and let someone else manage the books for you, we recommend that you hire a virtual bookkeeper. Virtual bookkeepers will keep track of all income and expenses for you, and they will provide you with the financial reports that you need to hand over to your CPA to file your tax return. Our virtual bookkeeping services guide includes the cost and benefits of the top bookkeeping service providers.
8. Office Rent
Office rent is one of the biggest expenses for any small business. Luckily, office rent is also tax-deductible. This also includes the common area maintenance charges that landlords pass onto tenants to clean the offices and take out the trash every day.
9. Office Equipment and Supplies
Similar to office rent, office equipment and supplies are also tax-deductible. This includes computers, furniture, copy machines, water coolers or anything else you purchase for your office. Generally speaking, you must depreciate or write off a portion of the cost over its useful life cycle. If your purchases meet the Section 179 criteria, you could deduct up to $1 million of all property and equipment in the first year as opposed to spreading it out over multiple years.
10. Internet and Phone Costs
Internet access and phone systems are also tax-deductible. Depending on the number of agents in your office, both can be significant expenses that eat into your bottom line. For example, voice-over-internet-protocol (VoIP) starts at $32.95 per month or about $400 per year for up to four users vs. landlines, which on average start at $560 per month or $6,756 per year. Learn more about what phone system is the best in our Small Business Phone System guide.
Marketing and Advertising Costs for Real Estate Agents
Like most businesses, you can deduct the money that you spend to promote your business. This includes business cards, a website as well as signage to advertise an open house. In addition, if you hire a college student to do your social media or you use Constant Contact to do your email blasts and newsletters to clients, these costs are also considered deductible marketing costs.
Below are some examples of the types of marketing and advertising tax write-offs for Real Estate Agents:
11. Marketing and Advertising Costs
If you’re making well-informed decisions on where your marketing dollars go, there is often a direct correlation between your marketing spend and how much money you make. Top producers in this industry can have five-figure monthly marketing budgets.
Luckily, all of your marketing and advertising costs are tax-deductible. Whether you’re buying something as cheap as virtual staging or postcards or spending thousands on billboard advertising, you can expect to recoup roughly half that expense in tax deductions.
One of the most cost-effective ways to market your business is by signing up for Zillow Premier Agent. Now that you know you’ll get roughly half the cost of Premier agent back, this might be a great time to see what all the fuss is about.
Buying nice signs to market your listings and open houses can get expensive. Why not get a tax deduction for the expense? If you’d like to learn more about real estate signs, check out our in-depth guide on the Best Real Estate Signs.
Travel and Entertainment Deductions for Real Estate Agents
If you decide to take a continuing education course out of town or attend a convention that requires an overnight stay, you can deduct most of your travel expenses like airfare, registration fees, hotel and meals. Check out our Travel & Entertainment Deductions guide for more details on what you can deduct and how much.
Some of the travel and entertainment deductions that you can deduct as a Real Estate Agent include:
13. Conventions and Conferences
If you travel to attend a convention or conference like the NAR Conference or Inman Connect, you can deduct travel expenses and lodging expenses. You can even deduct the price of meals when you’re away for business, but this deduction is limited to 50 percent.
14. Taxi or Uber Fare
If you’re an urban agent, then you may not need or want to have to deal with the expense and hassle of owning a car in the city. Instead, Uber or Lyft can be an amazing way to get from point A to point B quickly and easily. Even better, instead of paying attention to the road, you can sit back and answer emails, make phone calls or chat with your clients.
15. Client Meals or Entertainment
While you generally can’t write off your solo lunches and dinners unless you’re traveling for business, you can write off half the cost of meals where you devote a substantial amount of the time to discussing business with your clients.
As far as entertainment goes, you’re probably going to have a harder time explaining how your $500 Hamilton tickets can be written off because you talked to your client for a minute at intermission. That said, you can still write off half the expense if you can prove they’re business-related.
Other Miscellaneous Deductions for Real Estate Agents
In addition to vehicle and office deductions, there are several other miscellaneous tax write-offs for Real Estate Agents that you may not have considered, Client gifts, contributions to a retirement plan and desk fees are just a few of them.
Listed below are 10 additional miscellaneous tax deductions you just might be missing out on:
16. Client Gifts
While you should be spending far more than $25 for a good closing gift, being able to write off a portion of it is still better than nothing. If you use pop by gifts as a part of your marketing strategy, you can probably write off each gift.
17. Retirement Plan Contribution
Another great Real Estate Agent tax deduction is your retirement plan contributions. If you haven’t already set up your retirement plan, you need to start researching. Check out our in-depth guide on small business retirement plans to get started. This deduction is only limited by your contribution limits. For example, you’re limited to 12.5 percent contribution with a standard individual retirement account (IRA), 25 percent of your income (up to $53,000) with a simplified employee pension (SEP) IRA and $5,500 for a Roth IRA.
18. Desk Fees
Depending on what agency you work for, desk fees can eat up a lot of your profits. Since they’re tax-deductible, working for a high split franchise might be a good career move. If you’re thinking of switching firms, check out our in-depth guide on how to choose a real estate company to work for.
19. Continuing Education
Your continuing education (CE) courses are also deductible. While CE courses are generally pretty inexpensive, every little bit helps. Learn more about continuing education requirements and the best providers.
20. Annual Dues and Membership Fees
Another great deduction available to Real Estate Agents is annual dues and membership fees. That means your NAR or Real Estate Board of New York dues or dues for designations or certifications like accredited buyer’s representative, short sale and foreclosure resource or seller representative specialist. The only drawback is that the portion of your dues that goes to political lobbying is not deductible. For NAR dues in 2018, the percentage designated for political lobbying is 43 percent.
Small business insurance and errors and omissions (E&O) insurance are deductible. You must have your own policy, however. If your brokerage is paying or charging you for E&O, that is not deductible, unless it’s covered by desk fees, which are deductible.
22. Legal or Professional Services
You can also write off any expenses from professional services you may use. This includes but is not limited to fees paid to your lawyer, tax professional, graphic designer, web designer and title company.
23. Interest on Business Loans or Business Credit Cards
Interest on business loans or dedicated business credit cards is another great tax deduction for Real Estate Agents. The only caveat here is that the loans or credit lines must be solely used for your business in order to claim the deduction. If you use a personal card or personal loan to pay for business expenses, you can still deduct them, but you need to keep a record of which were business expenses and which were personal.
It is not a good idea to commingle business and personal expenses. You should set up a business checking account as soon as possible to keep track of your business income and expenses. We’ve done the legwork for you in our Best Small Business Checking Accounts guide.
24. Franchise Fees
Franchise fees paid to national franchises are also tax-deductible. Depending on which franchise you’re working with, these fees can also be significant.
25. Wages and Benefits Paid to Employees
While your agents probably don’t work on a salary or have company-sponsored benefits, your administrative assistant and cleaning staff most certainly do. Wages paid to employees are tax-deductible as well as benefits like health care and tuition reimbursement fees.
Four Tips to Get the Most Out of Your Tax Deductions
Whether you plan to hire a tax professional or prepare your own taxes using tax software, there are some basic guidelines that you need to follow to get the most out of your tax deductions and stay compliant with the IRS.
Listed below are four tips to help you get the most out of your real estate agent tax deductions:
1. Make Sure Your Deductions are ‘Ordinary and Necessary’
“Ordinary and necessary” is the language the IRS uses to determine whether or not a business expense is tax-deductible. While this may seem (necessarily) vague, it’s something you always need to keep in mind when adding up deductions in April.
For example, if you’re selling five $100,000 houses per year in Ohio and try to deduct the cost of a brand new Ferrari 458, the IRS is probably going to pay you a visit. While this is an obvious exaggeration, you should use “ordinary and necessary” as a rough yardstick for all your potential deductions.
2. Don’t Cheat On Your Taxes
While cheating on your taxes to save a few bucks is certainly tempting, the consequences can quite literally ruin your life. Whether you prepare your own tax return or you hire a tax professional, you are ultimately on the hook for the information reported on your tax return. Your signature at the bottom of that tax return means that you agree with everything that has been reported and that the information is accurate.
That’s why it is important to have your CPA or tax professional go over the return with you to make sure you understand the deductions and income that has been reported on your tax return. Unfortunately, there are some unscrupulous tax preparers that think they can beat the system. Just remember that, if you do get caught, tax fraud is a felony. If you are convicted of tax fraud, you could serve up to five years in jail and penalties of $100,000 or more.
3. Only Take Tax Advice from a Tax Professional
While your co-workers may have been in the industry for years and drive BMWs, they are not licensed tax professionals. This means that you cannot under any circumstances trust them to give you accurate advice on your taxes. If you have a question about your taxes, always consult a licensed tax professional. Check out our National Bookkeeper Directory to locate a firm that provides tax consulting services.
4. Document Everything
If you’re not in the habit of documenting every single expense, you should start today. This means documenting your mileage, keeping receipts and tracking all business expenses. This can be as simple as downloading an app. Check out our top recommended business expense tracker apps for more details.
The Bottom Line
We have shared with you our top real estate agent tax deductions. It’s extremely important you accurately track your mileage and expenses as estimates are not allowed. The time spent will be worthwhile as the deductions will save you both self-employment and income tax.