It may seem a bit early to start thinking about tax season. However, preparing for income taxes is not something you do only in January.
Being a real estate agent is a business, and like any other business, it involves expenses – the tax deductible kind.
By tracking your expenses regularly, you can log your deductible expenses as they occur, rather than trying to figure them out when tax time comes around. Don’t risk overlooking a deductible expense you are entitled to write off.
Many people are not clear on which expenses can be deducted. Figuring this out by going through receipts at tax time with your tax preparer can be costly and time consuming. Knowledge of which expenses can be deducted as business expenses at the time they are incurred not only saves you on tax preparation costs, but also allows you to maximize your deduction benefits on your tax returns.
As a real estate professional, you are entitled to dozens of possible tax deductions. Real estate business expenses are deductible if they are:
- ordinary and necessary;
- directly related to your business; and
- reasonable in amount. [Internal Revenue Code §162]
Personal expenses such as the cost of a home computer used for paying bills, gaming or other personal purposes are not deductible as business expenses.
If you purchased something for both personal and business use, such as a cell phone, you can deduct only the business portion of the expense. Generally, if you use your cell phone only 50% of the time for business, then you can only deduct 50% the cost of the phone and its service as a business expense.
The Internal Revenue Service (IRS), with some exceptions, does not limit the amount you can deduct, as long as the amount is reasonable. As a general rule, an expense is reasonable if more economical and practical ways to achieve the same result don’t exist. If the IRS deems your deductions as unreasonable, they will disallow the portion they find unreasonable, if not the entire deduction. [IRC §162]
Common business expenses for real estate agents and brokers include:
- agent and employee compensation – including fees, wages and benefits;
- California Bureau of Real Estate (CalBRE) license renewal fees;
- business meals and entertainment (50% deductible);
- client closing gifts;
- continuing education, seminars and training to maintain your license or improve your skills;
- computer software;
- desk fees;
- home office expenses (within IRS guidelines) [IRS Publication 587];
- individual retirement account (IRA) contributions (except Roth IRA) [IRC §4975(e)(1)];
- insurance – including health, errors and omissions (E & O), business liability and business equipment insurance;
- interest on business loans and business credit cards;
- internet access fees;
- marketing expenses – including newspaper, magazine and online advertising, websites, domain registration, mailing lists, flyers, promotional materials, signs and logo clothing;
- office equipment [IRC Section 179];
- office expenses – including rent, maintenance and utilities;
- office supplies;
- open house expenses such as food and drink;
- professional membership fees – including multiple listing service (MLS), trade union and Chamber of Commerce membership;
- professional services fees – including bookkeeping, accounting and legal;
- referral fees paid to other brokers;
- real estate franchise fees;
- subscriptions – including professional journals and periodicals;
- taxes – including payroll taxes for employees, state and local business taxes;
- telephone service;
- travel expenses for business conventions and training – including lodging, meals, parking, and transportation; and
- vehicle expenses – including business mileage, depreciation, insurance, interest on car loans, lease payments, DMV registration fees, vehicle maintenance, parking and tolls (you can deduct either the actual expenses or the Standard Mileage Rate). [IRS Publication 463]
Get your receipts in order ahead of time. Track your expenses as you go. Leaving this task for the last minute can cause you to miss out from benefiting fully on allowable business expense deductions.
If there are other tax deductible business expenses you have used in the past that are not mentioned here, please let us know!
This article was originally posted in July of 2013 and has been updated.