Real estate agents and brokers receive commissions from sales transactions as their income. They aren't considered employees. They are independent contractors or self-employed sole proprietors. They don't have taxes taken out of their commission checks. They receive a 1099 Form at the end of the year. This status allows real estate agents and brokers to deduct many of their expenses from their real estate sales or property management work.
Keep Records of All Expenses
It is important for real estate agents and brokers to keep records of all of their business expenses. Many real estate agents use accounting software, such as the TurboTax Self Employed or Quickbooks Self Employed, to do this. This way they will have everything in one place on their computer for tax time. It is recommended to have a basic filing system for receipts, bills, credit card statements and other documents for your business expenses. Certain documents need to be kept in a file for several years such as documents for your car, office equipment, and office furniture. These depreciate and are deducted over time.
Commissions Paid to Other Agents or Brokers
Real estate commissions paid to other real estate agents or brokers who work under you are tax-deductible. If you are a real estate managing broker who takes in all of the commissions and pays your agents, this deduction should absolutely not be overlooked or forgotten.
Most Common Real Estate Agent and Broker Tax Deductions
Marketing:
Real estate agents and brokers can deduct what they pay for marketing. This includes their for sale and for rent signs, open house signs, business cards, flyers, website development and hosting, mailers and more.
Education:
Real estate education is also tax-deductible. Real estate training classes, continuing education classes, and coaching are included. Real estate licensing and renewal fees are tax-deductible.
Dues:
Dues paid to the National Association of Realtors®, their state Realtor® association, and their local Realtor® association are tax-deductible. Another tax deduction is a real estate agent or broker's multiple listing service (MLS) dues. Any brokerage fees agents or brokers pay is a tax deduction.
Transportation:
A real estate agent's car purchases or leases are tax-deductible. Automobile maintenance and repairs are deductible. Their gas, mileage, automobile insurance and business-related parking costs are deductible, as well. Business-related travel expenses such as airfare, hotels or other lodging and meals are also deductible.
Home Office Expenses:
Whether a real estate agent or broker rents or owns their home, if they work out of a home office regularly they will most likely be able to take tax deductions for that. Agents must qualify to take these deductions. They must use a part of their home exclusively and regularly for their real estate businesses. It must also be their principal place of business where they regularly meet clients. It's important to ask a tax professional for advice on how these deductions work.
Gifts
Real estate agents and brokers may purchase gifts for their clients. Many agents give closing gifts to their clients. It is legal to give gifts to any party to a transaction. There are limits to these gifts, so important for them to ask their tax professional what is acceptable.
Charitable Gifts
Some real estate agents and brokers give a portion of their commissions to charities. Some sponsor and pay for or contribute to charitable functions. These are considered charitable gifts and are allowable as tax deductions.
Professional Tax Advice
It is highly recommended that real estate agents and brokers obtain professional tax advice. It's a good idea for them to have their tax returns prepared by professional accountants. Many real estate agents and brokers have to pay quarterly taxes. Tax laws change year to year. Real estate agents and brokers are also responsible for paying self-employment tax. There is quite a lot involved in tax returns for real estate agents and brokers.
The good news is that real estate agents and brokers have a lot of options for tax deductions. Making the most of their tax deduction opportunities is vital so they don't pay more than necessary in taxes.