Tax Tips for Real Estate Agents from Linda de Marlor, the Famous “Tax Lady”
Track Your Business Expenses
Most business expenses will save you over 40% on your taxes. For example: a $1000 computer will really only cost you $600 out of pocket. The reason you save so much ($400) is because as a self-employed Realtor you pay 4, yes 4, taxes on all money you earn for which you do not have a business deduction. Federal tax, State tax, Social Security tax, and Medicare tax. It only takes net earnings of $40,000 per year, whether you are married or single, to be in this 40% tax bracket.
- Self-employed people have relatively complicated returns and are frequent targets of IRS audits. By maintaining the proper substantiation you can protect yourself.
Car expenses are one of the largest Real Estate Agent deductions!
- Keep a mileage log to substantiate your business miles (It’s usually the first item the IRS requests).
- Don’t forget to deduct the interest on your car loan and personal property tax on car! These are both deductible whether you itemize your car deductions or take the standard mileage rate! This year it is $0.56 1/2 per mile.
An Office-In-Home deduction is allowed provided the area is used regularly and exclusively for business use. This replaces the previous law that required a separate entrance and paying tax on the gain when you sold your home. The Office in-Home deduction is allowed whether you rent your home or own it. This means you deduct an average of 8 to 10% of all the costs of your home including depreciation or rent. Some of our clients are even entitled to 50% because they use their whole basement as an office. This is one of the 3 most overlooked tax deductions for all Realtors!
- Maintain records of your utility bills, home repairs, insurance, condo fees, etc.
Estimated Tax Payments
Federal due dates are April 15th, June 15th, September 15th and January 15th. Most states are the same. Paying late is expensive. Late filing penalties and interest in the DC metropolitan are 23%, neither of which are deductible. This means that a late $1000 estimated payment could cost you $1230.
Hire Your Spouse (The 2nd Most Overlooked Deduction for Realtors) As a self-employed individual you are allowed to hire yourself or your spouse and deduct 100% of your medical bills, including health insurance, co-pays, visual, dental etc., as a business expense.
- You also have the option to hire your children and reap tax advantages.
- NOTE: Both situations require a written plan in accordance with IRS regulations.
Individual 401k Plan (3rd Most Overlooked Realtor Tax Deduction & Linda’s Favorite!)
As a self-employed individual you may set up a Solo 401k providing you with 3 benefits:
- Total protection of your retirement assets from creditors and lawsuits (IRS and Spouse excluded) and bankruptcy.
- You may borrow, at any time, from your plan if you need liquid cash (ex. Purchase of a home or rental property or for any reason whatsoever).
- Much more generous contribution limits than that of an IRA or a SEP IRA. Only a Solo 401(k) is a QUALIFIED account. The old, and now outdated, IRA or SEP’s are UNQUALIFIED accounts. With a Solo 401(k) you can contribute until October 15 of the next year or you can skip making contributions, there is no required amount that must be contributed.
Hot Off the Press!
For 2021 & 2022, 100% of business meals are deductible. The meals must be supplied by a restaurant and you must be present with your client, agent, partner, professional advisor, etc. You don’t need to eat them in the restaurant as long as the meal is ordered/supplied from one. It could be takeout or delivered by Uber eats or GrubHub.
Most commonly this occurs when you’re out showing properties and stop in Panera or Starbucks. You and the client enjoy some food together. This also could occur at a sporting event or before or after the theater or some kind of entertainment/event. The cost of the entertainment itself is not deductible just the actual food. This is a wonderful tax break. Since 1986 business meals have been limited, most recently to only 50%.
- A restaurant does not include grocery stores, convenience stores, or vending machines, etc. Those are still limited to 50%.