Though there are thousands of things most people would rather do than prepare and file their own income tax returns, learning some tax law basics can help you identify some quick ways to save money. One way to lower your tax bill is to deduct business-related expenses from your taxable business income. The lower your taxable income, the less you pay in taxes. Real estate professionals like you often spend thousands of dollars each year to operate their businesses, so it’s important to understand which expenses can be deducted so you don’t leave any money on the table.
There are a few important deductions—and changes—that real estate agents and brokers should note for the 2022 tax year. Below we discuss these changes and some deductions and credits that can help those in the real estate industry reduce their overall tax bills.
Section 199A/QBI Deduction
One of the most impactful changes enacted by the Tax Cuts and Jobs Act of 2017 was the section 199A deduction.
Self-employed real estate professionals who earn commissions and meet certain income requirements may qualify for a 20% pass-through deduction under section 199A. The 199A deduction allows owners of pass-through businesses, partnerships, and sole proprietorships to deduct up to 20% of their “qualified business income” (QBI) from their taxable income. The IRS defines QBI as the “net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” This includes only items in taxable income connected with a U.S. trade or business. It excludes items like capital gains and losses, certain dividends, and interest income. “W-2 income, amounts received as reasonable compensation from an S corporation, amounts received as guaranteed payments from a partnership, and payments received by a partner for services under section 707(a) are also not QBI,” according to the IRS.
Currently, the 199A deduction is scheduled to sunset in 2025. But while many were concerned that the new administration would walk back this deduction, the president's 2022 budget does not include any changes to the 199A deduction. Additionally, Senate Bill 2387—introduced to make five specific improvements to the 199A deduction—is still pending in committee.
The 199A deduction means that if you make $100,000 a year, for example, you may be able to deduct up to $20,000 of it as QBI. The additional amount you can deduct from your real estate business income depends on the type of work you do and your tax filing status.
Tax Write-Offs and Deductions
In addition to claiming the section 199A deduction, you can reduce your tax bill even further by deducting expenses from your taxable business income. Real estate agents and brokers ordinarily list business tax write-offs on IRS Form 1040 Schedule C and personal deductions on Schedule A. The IRS uses these forms to calculate your tax obligation.
What Can a Full-Time Employed Real Estate Agent Write Off on Taxes?
Most real estate agents are 1099 self-employed. Those agents who are W2 employees may not itemize deductions for unreimbursed job-related expenses, such as entertainment, travel, and home office use. The Tax Cuts and Jobs Act eliminated these deductions for W2 employees beginning with the 2018 tax year.
What Can a 1099 Self-Employed Real Estate Agent Write Off on Taxes?
- The portion of your mortgage interest, property taxes, rent heating, air conditioning, electricity, and internet costs related to your home office, as long as your home office is your principal place of business
- Costs of furniture, computers, printers, and other equipment for your home office or rental space
- Monthly phone bills, including data service for cell phones and tablets used for work
- Business-related software and tools (e.g., CRM, accounting software)
- Desk fees charged by your broker
- Your new or used car that’s used for work. You may deduct the depreciation of a new or used car, or a monthly lease payment.
- Costs of shared rides to and from showings
- Costs of gas, as well as wear and tear on your car from driving to and from work.
In 2019, the IRS “standard mileage rate” is 58 cents per mile.
Research & Client Services
- Hotel and other travel costs when attending a convention or conference
- 50 percent of the cost of taking a client to lunch or dinner
- Parking meter at a client lunch Interest on business credit cards
- Continuing education courses
- National association dues or other membership fees
- Costs of staging a home
- Up to $25 per closing gift per client
Commissions & Fees
- Commissions and commission splits paid to other agents or brokers
- Fees paid for a client referral from another real estate agent
Marketing & Advertising Costs
- Multiple listing service (MLS) fees
- Costs of signs for listings and open houses
- Business cards
- Pay-per-click advertisements
- Writing and design fees for advertisements
- Clothing with your company logo on it
- Health insurance premiums
- Contributions to an Individual Retirement Account (IRA) or SEP IRA
- Self-employment tax
What Can a Real Estate Business Owner Write Off on Taxes?
Real estate agents who are W2 employees (instead of 1099 self-employed workers) are no longer permitted to itemize their deductions for unreimbursed job-related expenses. However, 1099 agents and broker-owners are able to deduct certain expenses. These include:
- Costs associated with real estate coaching, training, and education for employees
- Accounting system installation
- Business-related attorneys’ fees
- A portion of employee parking spaces or of an owned or leased parking facility
- Business start-up expenses
- Business insurance
- Office expenses, including cleaning and maintenance
5 Tips for Real Estate Business Owners When It Comes to Taxes
Keep good records. Missing out on a tax deduction could mean you’re leaving money on the table.
File for an extension if necessary. If you’re having trouble meeting the IRA tax filing deadline, consider filing for an extension to give yourself more time. You’ll still be required to pay your taxes on time, but you can provide them with an estimate for the amount you think you owe.
Make quarterly estimated tax payments. The IRS requires self-employed individuals to make quarterly tax payments if the taxpayer will owe at least $1,000 in taxes for the year (after withholding and other credits), and their withholding and refundable credits cover less than 90% of their tax liability for the current year, or less than 100% of the previous year’s tax liability, whichever is smaller.
Save for retirement. It means you won’t have to work forever. And certain contributions to a traditional IRA or SEP IRA are deductible from federally taxable income.
Seek help from a tax professional. Making tax mistakes can be costly. Consider working with an accountant or other tax professional to help navigate your taxes.
Other Real Estate Tax Deductions
Many expenses real estate agents and brokers incur in the ordinary course of their businesses may be tax deductible, but these deductions are unique enough that they're not always commonly known. Below are a few:
- Clothing. Clothing for work is tax deductible if it has your company logo on it. Additionally, you may be able to deduct the cost of dry cleaning clothes with your company logo.
- Continuing education. Although the cost of attending real estate school can't usually be written off, agents and brokers are able to deduct the costs of continuing education.
- Closing gifts. Gifts presented to clients at closing are tax deductible up to a limit of $25 per client per year.
- "Reasonable" advertising costs. There aren't any hard-and-fast rules on how much is too much to deduct for advertising costs; however, it's important to keep these costs within reasonable limits of what agents in your situation (that is, agents with a similar number of years of experience and agencies of similar size) are spending. If it's typical for agents to spend 15% to 30% of their income on marketing, and you're spending 75% to 80%, the IRS may disallow at least part of this deduction.
- Referral fees. Any fees you pay to another agent for a referral are tax deductible. It's a good idea to send the referrer a 1099 to better track this income.
- Real estate commissions**.** Generally, real estate commissions can be deducted against the agent's gross commissions.
Though many of the deductions available to real estate agents and brokers (particularly the $25 closing gift limit) may seem too minor to be worthwhile, over the course of a year, they can add up. It's important to stay organized throughout the year so that you're not scrambling to gather information at tax time. Consider using software designed to help you organize deductible expenses or enlisting the help of a tax professional to help you make the most of all available deductions.