Tax season is right around the corner, and it's time to start thinking about how you can save some money. One of the best ways that real estate agents can reduce their tax burden is by claiming deductions on their taxes for all of those expenses they incur during the course of business.
This guide will look at 20 of the most common real estate agents deductions that you can start claiming today.
But before we delve into that, here's a quick overview of what tax deductions are.
Tax deductions are expenses that you incur throughout the course of your business, and can be subtracted from your total annual income before calculating how much tax you owe the IRS.
Note that it's illegal to claim a deduction for personal expenses -- so don't try to pass off your daily Starbucks habit as an expense incurred while doing work-related tasks.
However, it's perfectly fine to claim any expenses that you incur for your business, including office supplies and utilities.
In fact, there are several ways real estate agents can reduce their tax burden by claiming these deductions every year--as long as they follow the rules.
Note: if you want an automatic way to claim these real estate agent tax deductions, try Bonsai Tax. Our real estate agent tax software will scan your bank/credit card receipts to discover potential write-offs, estimate your taxes, and send you filing reminders. In fact, our app typically saves users $5,600 from their tax bill. Claim your 7-day free trial here.
You'll need to keep detailed records of these write-offs as proof in case you get audited by the IRS. Here are the business expenses you can write off as a real estate agent for more tax savings. To discover how to lower your tax bill even more, be sure to read about other tax hacks for freelancers.
If you use your car for business purposes, then every mile that you drive can be written off as a tax deduction.
If you drive your own vehicle to meet with clients, track the number of miles that you drove and deduct this on your tax return. If you use a company car, don't worry - the mileage will already be tracked for you.
You can claim a vehicle tax deduction using two methods:
Standard mileage deduction involves you taking a cost per mileage driven for business purposes. For the tax year 2023, the standard mileage rate for use of a car (also vans, pickups, or panel trucks) is 62.5 cents per mile driven. This covers expenses incurred during business usage of your vehicle including gas, car loan interests, registration costs, parking fees, and repairs.
So, if you drove 1,000 miles over the course of the year to meet potential clients, you can write off $625 from your tax bill.
Itemized deduction is more complex and involves you itemizing the expenses you’ve incurred throughout the year for maintaining and servicing your car. You can track your miles with our online mileage tracker template.
Real estate agents need to have insurance in place before they start operating -- and any premiums paid throughout the year can be written off on their taxes.
Keep records of all insurance premiums related to real estate sales or listings. Some of the coverages you can write off include:
Legal costs associated with business dealings are 100% tax-deductible -- including consultations and court fees related to buying and selling property.
For example, an attorney may be necessary when buying a new home because you are not familiar with all aspects of the transaction. Maybe you are starting an LLC/ setting up your business structure and incurring some business start-up costs. Or perhaps someone is suing you over non-payment in real estate transactions - this will certainly incur some legal costs.
The Internal Revenue Service allows deductions for business use of part of your home if you meet certain criteria, including that the space is used regularly and exclusively for work. You can deduct expenses related to the business use of this area as well as depreciation on its value as a home office reimbursement.
Remember, your home office has to be used exclusively and regularly for business. You can use this deduction worksheet to track your actual expenses.
In addition to your home office deduction, you can deduct a variety of equipment.
These include computers and related software; cellular phones or pagers used in the business; fax machines and answering devices for work-related use at home; depreciation on furniture, fixtures, and appliances purchased for an agent's place of business – but only if the agent uses them more than 50% of the time for their real estate business.
There are several ways to market as a real estate agent and all of those costs can be used as tax deductions. All you need is to keep track of your expenses throughout the year so that you have them ready for when it's time to file taxes.
As a real estate agent, you’ll often incur these costs when advertising your business:
As a 1099 consultant, any fees associated with attending conferences, seminars, or trade shows can be claimed as a tax deduction for real estate agents--so long as they are directly related to your business and improve upon your skillset.
These can be deducted in full or prorated based on how much they were used during the year. For example, if you join an association that costs $300 a month but only attend one of their seminars this year, then your deduction would be limited to 25% of the cost ($75).
To get the full deduction, real estate agents should keep receipts and records of how much they paid for each association membership.
Note: If you are looking for an automatic way to record all of your real estate deductions, try our tax software, Bonsai Tax. Our app can help you easily track and record all of your tax receipts for the IRS. It would be stored online for easy access so it doesn't matter how long you need to keep receipts in case of an audit. Typically, users save $5,600 with our app. Try a 7-day free trial today.
Real estate agents can deduct the cost of education and training required for their job. The costs associated with these courses, such as textbooks and study guides, are also deductible.
To deduct these expenses, however, the IRS requires you to meet a few requirements:
Some other tax deductions for real estate agents include fees to license boards such as state broker commissions or registration fees with local municipalities.
These can be deducted in full provided you have a receipt proving their cost. Property management fee costs are also deductible if you pay them from your own pocket instead of charging tenants directly on top of rent payments (in which case no deduction is allowed).
Real estate agents are able to write off a portion of their monthly cell phone bill. The deduction is based on the number of calls made for business purposes, which you can track through your records.
And if you buy a new phone to conduct business, you can write off the cost of this phone too.
If your work requires you to travel out of town, this means that any expenses incurred can be claimed as a business travel tax deduction.
Travel expenses are deducted in the following order:
Most business trips fall under this category including driving a car or using public transportation to get around town for appointments with clients.
If you use a private vehicle, then fuel charges can be deducted as well when filing taxes next year.
Realize, though, that there are direct costs and indirect costs.
Direct costs are those associated with the actual trip itself such as airfare or gas for your car. On the other hand, indirect costs include general items that relate only remotely to the purpose of the trip like business meals and entertainment.
The costs of meals and drinks while traveling on business are deductible if they meet the criteria for a meal in a clear business setting. We recommend you use an expense tracker for travel that automatically discovers and records your deductions.
If you go out for lunch or dinner with potential clients, any meals can be claimed as tax-deductible. However, you can only claim 50% of your meal.
If you go out for lunch or dinner with existing clients and/or associates who aren't potential leads, these expenses are considered entertainment and cannot be claimed as tax-deductible.
When real estate agents sell a home, they may have to pay the seller commissions. These commissions are paid by the home seller and are typically divided up between both the buyer's agent and the selling agent, according to whatever is agreed upon before the sale of the home occurs.
When these commissions are paid by either of these two parties, then this expense may be deducted..
The health insurance deduction is available to any self-employed individual. Because real estate agents are considered self-employed, this means that they may be able to deduct the premiums paid on their own private health insurance policies.
This deduction can cover payments made for both their spouses and children. The only stipulation when it comes to qualifying for this type of deduction is that you should not be eligible to participate in a health insurance plan maintained by your employer or your spouse's employer
Real estate agents may also be able to deduct dues and fees paid to associations or organizations. These deductible business expenses can include things such as:
Real estate agents have to pay for all kinds of expenses to run their businesses, one example being software. In terms of taxes, if this software is used only for the purpose of real estate activities, then it may be deductible.
This means that if you use any accounting software to help manage your books, then it might be deductible. A tracking app for receipts would fall under this category and be deductible.
Real estate agents may also be able to deduct any desk fees that may have been paid. Desk fees can also include the monthly charges for renting a desk from an office supply company.
Receiving therapy or mental health treatment may also be deductible for self-employed individuals or individuals who work from home. These expenses can include things such as:
Real estate agents who also own rental property may be able to deduct any revenue losses they incurred during the tax year. These can include things like:
You can write off all the gifts you gave to your clients throughout the year--but there's a limit! You can only claim the price of gifts up to $25 per person, but you may be able to write off more if your clients were under obligation (i.e., wedding gift for a daughter).
Are you having trouble navigating 1099 forms? Check out this breakdown of all 21 1099 types, and you’ll understand their intended purpose and use in no time.
How do you send W-2 forms as an employer? How do you protect sensitive information when delivering W-2s? Find out right here.
It’s tough to figure out how much money to set aside as a 1099 contractor, especially with quarterly payments in play. Use this article to figure out how much you have to pay.
