Being a real estate agent comes with a lot of demands, including filing your income taxes accurately and on time. Taxes can be challenging for a realtor, especially since realtors are treated by the IRS as self-employed workers.
Find out how to make your taxes part of your ongoing business success.
The PATH Act
The Obama Administration passed the Protecting Americans from Tax Hikes (PATH) Act in 2015, which provides real estate agents and brokers tax relief via business-related purchases.
The IRS changed Section 179 deductions, which allows you to deduct all – or a larger portion – of work-related expenses. For example, realtors often use their cars for real estate showings, and you can write off up to $25,000 for the price of a new car in the year you purchased it.
There are limits to how many deductible expenses you can have as an agent, however. Here are some common deductions related to business activities.
Education
Realtors have to stay current on the market and learn new laws and regulations all the time to provide better service to clients. This may involve education that could be deductible, such as real estate training classes, coaching, and continuing education courses.
Marketing Assets
If you use marketing assets like campaign materials to attract home sellers or buyers, these may be allowable deductions. This may include open house signs, sale flyers, business cards, mailers, and billboards, as well as digital marketing and advertising like social ads and a website.
Transportation
If you use a vehicle for work, such as attending showings or driving around to put up for-sale signs, the related expenses are deductible. These may include:
- Gas
- Mileage
- Maintenance
- Insurance
- Lease costs
- Purchase costs
Licensing
Your renewal and licensing fees are considered a work expense and deductible. This is also true of the association dues or multiple listing service.
Utilities
Whether you work out of an office or at home, the utilities that are required to do your job are likely to be deductible. This may include your internet service, electric bills, and phone bill.
Insurance
Your general liability and professional liability insurance, which are necessary to provide professional advice and interact with third parties, may be deductible. That’s only if they’re covered by you, not your brokerage.
Home Office
Similar to your utilities, your home office expenses may be deductible. This is true if you rent or own, but how much you’re permitted to write off depends on the usage of that office space and the square footage.
Work Travel
For many realtors, travel is part of the job to serve clients and see different properties. If you have to travel for work or educational reasons, those expenses are likely deductible, including airfare, accommodation, meals, and local transportation.
How to File Taxes as a Real Estate Agent
Ready to file? Here are the steps:
Gather Your Records
The first step is always gathering your records to ensure you have all the information at hand. You should have:
- Business earnings
- Business expenses
- Copies of all related receipts
- Applicable deductions
Determine Your Employment Status
Most real estate agents are self-employed. There’s a big difference in how taxes are paid for self-employed vs. employed individuals.
For employees, the taxes are automatically withheld by the employer and subtracted from the earned wages. Employees file taxes, in part, to ensure that the employer has paid the correct amount.
Self-employed individuals or independent contractors do not have taxes taken out of their income, so they must pay quarterly tax payments and declare their earnings. When you’re self-employed, you have to make sure to pay the right amount.
The 1099-MISC is basically a W-2 for self-employed realtors. Typically, the broker provides this form each year to indicate how much money you earned.
Form 1040 is the annual tax return form, which is used to report individual income tax. You also use the Schedule SE to calculate your taxes and Schedule C to calculate your profit. Form 1040-ES is a form to help you estimate and pay your quarterly taxes.
Then, you have state income tax forms. Depending on the state you work in, you may need to fill out additional forms to determine the income tax you owe to the state. Only a few states don’t have income tax, and those are Alaska, Nevada, South Dakota, Washington, Wyoming, Texas, and Florida.
File Your Taxes
Filing your taxes can be done on your own with tax software or through an accountant. The former is a cost-effective way to ensure that you’re filing your taxes correctly to streamline the process and provide accurate information.
Make Quarterly Tax Payments
When you’re self-employed, you’re responsible for paying your own taxes every quarter on:
- January 15: This is the tax payment for income earned between September 1 and December 31 of the previous year.
- April 15: This is the tax payment for income earned between January 1 and March 31.
- June 15: This is the tax payment due on the income earned between April 1 and May 31.
- September 15: This is the tax payment due on the income earned between June 1 and August 31.
Your payments include not only your taxes, but Social Security and Medicare. These are typically paid by the employer, but as a self-employed individual, they’re your responsibility.
Tips to File Your Taxes as a Realtor or Real Estate Agent
Here are some tips to help you file confidently as an agent.
Stay Organized
Whether you’re an employed realtor or an independent contractor, staying organized is important for avoiding a lot of stress when it comes to the time for your filing.
Make sure you keep all your tax forms in an accessible place and put all your records there. Avoid having documents scattered in several locations. Take pictures of your receipts and save them on your phone as you incur expenses and make it a habit to create copies to store with your tax documents.
You should also archive your old tax forms in case you need to reference them for your filings.
Take Your Time
It’s easy to make mistakes on your tax forms that can result in legal issues. Some of the common errors include:
- Missing your name
- Having an illegible name or address
- Miscalculating your income or expenses
- Not including a postage stamp
- Missing a signature or return data
- Forgetting to make out your payment check correctly
- Not including relevant forms
- Wrong taxpayer ID number
- Underpayment, which can result in tax penalties
- Underreporting, which can result in fines and penalties
Include Your Deductions
As mentioned, there are numerous deductions related to real estate that you can claim. Don’t focus only on big expenses, because small things like the mileage on your car driving around town or your marketing assets can add up quickly.
Don’t Forget Tax Credits
In some cases, you may have eligible tax credits. There are many that may apply, so it depends on your personal and financial situations. Some of the tax credits that may apply include:
- Earned income tax credit
- Dependent care
- Child tax credit
- Education credits
- Saver’s credit
Organize Your Taxes
Filing your taxes as a realtor can be stressful, but not when you have a system down. By staying organized, planning throughout the year, and using a tool like predictive account software, you can ensure your taxes are filed correctly with the maximum credits and deductions.
Author Bio:
Name: Shahar Plinner
Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.
