You can probably think of about 1,023 things you’d rather do than file your income taxes. They’re not easy for many people, especially business owners and 1099 employees. In fact, filing taxes can be so tedious and time-consuming, it’s easy to overlook important deductions that can save you money.
Most real estate agents and brokers are self-employed and responsible for paying their own taxes. Unlike a W2 employee, taxes are not withheld from a self-employed real estate professional’s paycheck. In fact, agents and brokers who are self-employed are required to pay a 15.3 percent self-employment tax, which includes 12.4 percent for social security and 2.9 percent for Medicare taxes. Agents and brokers may also have to pay state income taxes, depending on where they live. (California and New York, we’re looking at you.)
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 yourself often spend thousands of dollars each year to operate their business, so it’s important to understand which expenses can be deducted so you don’t leave any money on the table.
The Section 199A/QBI Deduction
Self-employed real estate professionals who earn commissions and meet certain income requirements may qualify for a 20 percent pass-through deduction that was introduced with the Tax Cuts and Jobs Act in 2017. This deduction, known as the 199A Deduction, allows owners of pass-through businesses, partnerships, and those operating as sole proprietors to deduct up to 20 percent 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 only includes 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.
Since this tax law will apply to most brokers and agents, we’ll elaborate: It 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.
What Business Expenses Are Deductible?
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.
So, what expenses can you actually deduct? According to Tyler McBroom, CPA, MBA, managing partner of Measured Results, a professional accounting corporation, business expenses that are “ordinary and necessary” may be deducted from an individual’s self-employment income. The next section contains a list of these kinds of deductions that you can use as a guide.
Real Estate Agent Tax Deductions: 1099 Employees, Full-Time Employees, & Business Owners
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 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 Real Estate Business Owner Write Off on Taxes?
A real estate brokerage owner can deduct many of the same expenses that an agent may deduct. However, there may be some additional business-related expenses that a broker-owner can deduct, such as:
- Cost of real estate coaching, training, and education for employees
- Installation of an accounting system
- Attorney fees related to your business
- A portion of employee parking spaces, or of an owned or leased parking facility
- Business startup 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 percent of their tax liability for the current year, or less than 100 percent 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 Frequently Asked Questions About Real Estate Tax Deductions
McBroom offers his expert advice on some of the most common questions about tax deductions.
Can real estate agents and Realtors write off clothing? Clothing for work is deductible, as long as it has your company logo on it. This includes the cost of dry-cleaning shirts with logos on them.
Is real estate school considered a tax write-off? In most cases, the answer is no: Expenses that are “part of a program that will qualify you for a new trade or business” are not deductible. However, McBroom notes that the costs of continuing education courses you take once you’re in business are deductible.
Are closing gifts tax deductible? Closing gifts are tax deductible, but there’s a limit of $25 maximum deduction per client per year. Of course, most agents spend more than this amount on client gifts. According to McBroom, this limit has never been raised since the rule was first established over 50 years ago. If a client gift exceeds the limit, the agent may deduct the first $25 of the total cost.
How much can you write off for advertising? The rules aren’t exactly clear regarding how much an agent or broker can write off for advertising. McBroom suggests making sure that the advertising costs you deduct are in a “reasonable range” of what someone in a business your size would spend. For example, new agents may spend less than $1,000 on advertising, but experienced agents and brokers looking to grow their business may spend 15 to 30 percent of their income on marketing.
Are referral fees tax deductible? The fees you pay another agent for a referral are tax deductible. McBroom advises agents to send the referrer a 1099 for the amount they pay for the referral.
Can you deduct real estate commission? Yes, real estate commissions are deductible against the gross commissions an agent brings in.
Can I claim exam fees on my tax return? No: Fees incurred to take an exam that qualifies you for a new trade or business are not deductible.
The more tax deductions you take, the less money you’ll owe in taxes. And even small deductions can add up over the course of a year. (Remember, deductible business expenses must be ordinary and necessary, directly related to your real estate business and a reasonable amount.) The key is to stay organized throughout the year so you don’t miss anything.
To avoid feeling overwhelmed at tax time, consider keeping itemized lists saved somewhere on your phone or computer that include pictures of receipts. Also, consider enlisting the help of a tax professional to help you maximize your return.