There's a lot of confusion among business owners about which expenses they can deduct from their taxable income and which expenses aren't deductible.
The subject can be especially difficult for real estate professionals because there is so much you can deduct! From vehicle mileage when driving for business purposes to insurance, office supplies, and even some utilities, real estate agents have numerous opportunities to lower their tax burden.
Note: As with anything tax-related, working with a certified public accountant (CPA) or other tax professional can help you ensure all your deductions are correct and allow you to take full advantage of every available deduction.
The following eight deductions are ones that no real estate agent should overlook come tax time:
1. Insurance, license fees and dues
Real estate agent insurance premiums are deductible expenses. That’s right, you can generally write off every dollar you spend on business insurance, so make sure you get the coverage you need, including general liability, professional liability, and commercial auto insurance if you have a business-owned vehicle.
If you don't have another source of employer-sponsored health insurance, your health insurance premiums are also tax-deductible.
In addition, for most realtors, keeping your real estate license up-to-date requires you to pay fees. Lucky for you, the license renewal fees to keep your license current is also tax-deductible.
Don’t forget to account for professional membership fees and MLS dues — these can also be written off.
2. Commissions paid
Have you paid a portion of your commission to other agents or employees that work for you? Generally, these payments are fully deductible. These deductions can add up, so remember to include them.
3. Home office and utilities
Your home office represents a valuable real estate tax deduction. In general, the space must be 100% dedicated to running your business.
The office space must also be the primary place where you conduct business. For example, if you have a real estate office away from home but also do some business at your home office, the home space is not deductible.
Similarly, if you take the home office deduction, you cannot take the deduction for brokerage desk fees. So even if you split your time between your home office and brokerage, you have to choose one to deduct.
If you have a space reserved strictly for business, the simplified method for calculating this real estate tax deduction allows you to deduct $5 per square foot of your home office, up to 300 square feet.
On the other hand, you may choose to itemize your realtor tax deductions. This will allow you to claim other office-related expenses, including a percentage of real estate taxes, home improvement expenses, home depreciation, property taxes, homeowners insurance, utilities, and mortgage interest.
Working with your CPA or tax software, you can determine which method of calculation gives you the biggest write-off and choose that one.
Even if you don't claim a home office deduction, you can deduct a percentage of your internet and cell phone bills if you use those utilities at home for business purposes. You can also deduct other business-related office expenses, such as computers, software subscriptions, printer paper and ink etc.
4. Vehicle expenses and mileage
Whether you have a vehicle dedicated to business use or drive your personal vehicle to and from open houses, you can opt to take the standard mileage deduction.
For the 2022 tax season, you can deduct 58.5 cents per mile when you use your car, truck, or van for business purposes from January 1 to June 30. From July 1 through December 31, the deduction jumps to 62.5 cents per mile. In an unusual move, the IRS decided to bump up the standard mileage rate due to rising fuel costs.
You can track this activity with a number of different apps, or you can keep a simple paper log in your glove compartment and update it every night when you get home from work.
This real estate tax deduction can amount to thousands of dollars if you routinely drive your house-hunting clients to show homes or if you rack up miles just putting up and taking down signs. The key to taking the full mileage deduction is keeping careful track of the actual miles you drive for business purposes.
Similarly, while not mileage-related, you can also deduct other vehicle-related business expenses, such as parking fees for when you’re visiting a client or if you’re paying tolls. However, you can’t deduct the cost of parking at your place of work — this is considered a nondeductible commuting expense.
5. Self-employment tax
As a self-employed person, you'll pay the full 15.3% self-employment tax on your income. This is because you’re paying taxes as an employee and employer.
In general, everyone who pays taxes and has an employer pays 7.65% of their income to cover Social Security tax and Medicare tax. The employer covers the other 7.65%. Because you’re both, you have to pay the full 15.3% yourself.
Fortunately, once you figure out the amount you own, you can deduct half of that tax from your yearly net income so that you won’t be paying double tax compared to your W2 colleagues.
6. Marketing
Real estate marketing is another deductible business expense. Business cards, home fliers, website creation and maintenance, social marketing campaign creation and management, holiday cards, brochures, and signage are all important tax write-offs for realtors.
As a real estate agent, getting the word out about your business is crucial — and also completely tax-deductible. Any money you spend on marketing materials, radio, print, internet, social media, or television ads represents a real estate tax deduction. When developing your advertising budget, include this potential deduction to maximize your campaign's effect.
And it’s not just about your own business marketing; don’t forget about property marketing expenses for clients. You might pay for photographers, stagers, rental furniture, signage and more, so remember to keep track of and deduct these expenses.
7. Professional services
You work with many professional service providers when owning your own real estate business. Luckily, many of their fees are 100% tax deductible.
This could include certain attorney or legal services, CPA fees, bookkeepers, cleaners, etc. Keep track of these fees and separate any personal and business service expenses that may overlap.
8. Gifts
As a real estate professional, you probably give loads of business gifts to clients and associates. Good news — they’re deductible as long as you follow the IRS’s rules:
- You deduct no more than $25 of the cost of business gifts you give to each person during your tax year.
- If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
- Incidental costs (engraving, packing or shipping) aren't included in the $25 limit if they don't add substantial value to the gift.
- Don't consider gifts costing $4.00 or less that have your business name permanently engraved on the item and that you distribute regularly.
- Any item considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
- Keep records that prove the business purpose of the gift and details of the amount spent.
Some business expenses are not tax-deductible
According to the IRS, real estate tax deductions must not include any expenses related to entertainment. So sorry, no writing of concert tickets.
You must also keep your family, personal, and living expenses out of your realtor tax deductions. Political contributions, penalties and fines, lobbying expenses, and dues to any type of club or organization are also not tax-deductible.
As a realtor, you probably see your own home as an investment as well; unfortunately, any money you spend to improve your personal property is not tax-deductible. Remember, deducting expenses that aren't qualified under IRS rules could result in an audit, fines, and penalties.
If you are confused about what expenses qualify as tax write-offs for realtors, contact a CPA with experience handling small business taxes. They can help you understand the rules as they apply to your specific situation.
Take advantage of general business credits
There are many general business credits that could help significantly reduce real estate agent taxes. The IRS publishes a complete list of these general business credits with links to each of the required forms. The Work Opportunity Credit may provide some tax relief for realtors who want to hire employees.
Your education costs may be deductible
Real estate agents that take classes or seminars from an accredited university or college during the tax year should also investigate student education tax credits that help offset the costs of some types of education.
The American Opportunity Credit offers up to $2,500 per student per year if anyone in the household pays tuition, fees, and certain expenses during the first four years of their college education.
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