Tax Deductions for Real Estate Agents
Being a real estate agent can be a gratifying profession because you’re helping people find a home. But if you’re an independent contractor like most real estate agents, tax season can be quite a pain. Let’s dive through some real estate agent tax deductions that you shouldn’t overlook.
Real estate agent tax deductions you can’t miss
The more tax deductions you take, the lower your taxable income and the lower your taxes will be. While many of these apply to any self-employed worker, these are some specific deductions that apply to real estate agents and those in the real estate industry.
If you’re an independent contractor, you can deduct expenses for your real estate business as long as it’s ordinary and necessary, related to your business and reasonable in amount. These business deductions can go a long way toward lowering your taxable income for the year.
You likely spend a lot on your real estate business. Try not to mingle your personal and business expenses because you can only deduct the business costs. For example, if you buy a laptop for business use but use it to also play games or check out old flames on Facebook, you can’t write off the entire cost. It’s the same with a mobile phone—you can only take a deduction on the portion you use for business.
With that said, real estate agents can take a variety of tax deductions when it comes to business costs. This includes (but is not limited to): advertising costs, office supplies, Internet costs, interest on business credit cards, 50% of business meals and entertainment, fees for professional membership, costs of promotional materials and any software you buy.
Your vehicle can also be the source of some extremely valuable deductions.
It’s no secret, real estate agents use their cars a lot. In fact, one estimate said U.S. real estate agents put 3.6 billion business miles on their car. For many of you, the car is a mobile office and is vital for meeting prospects and touring houses.
The mileage deduction allows real estate agents to use all those business miles for large savings on their taxes. You can do this in two ways: using the standard mileage rate or via the actual expense method.
The standard mileage rate is more often and is easier to calculate. Simply track your business miles for the year and multiply it by the standard mileage rate for the year to come to your mileage deduction.
Actual expense method
Keep in mind, you will need to keep track of your personal and business miles for the year and have accurate mileage logs that are compliant with the IRS.
The actual expense method allows you to deduct the actual costs of using your car for business, plus depreciation. This includes fees for gas, parking, tires, insurance, lease payments and more. The actual expense method can result in a larger deduction but it is more of a hassle than using the standard mileage rate.
If you use the actual expense method the first year your car is used for business, you’re stuck with that method for the life of the vehicle. That’s why many real estate agents use the standard mileage rate the first year and then the IRS allows you to switch between methods for subsequent years.
Business vehicle deductions
The standard mileage rate includes expenses like gas, maintenance and more but it doesn’t cover all the driving-related expenses that real estate agents face. There are some overlooked car-related deductions that you should be aware of.
On top of the standard mileage rate, you can deduct the interest on a car loan, the parking and toll fees for business trips and the personal property tax you paid when you bought the vehicle. If you’re using your car for personal and business trips, you can only deduct the business portions of the taxes and interests.
Home office deduction
Many real estate agents do a lot of work at home. How many times have you taken calls, sent contracts or looked at properties online while at your house? If this sounds like you, be sure you’re maximizing the home office deduction.
There are three threshold requirements you must meet if you plan to take the home office deduction:
- You must be in business (learn more about what that means for real estate agents)
- The home office is used for business on a regular basis
- You must use part of the home exclusively for business
Along with these three requirements, you must also qualify for one of the following:
- The home office is your principal place of business
- You regularly use your home office for administrative or management activities for your business
- You meet customers at your home
- Inventory storage at your home
- A separate structure on your property exists exclusively for business purposes
It should be relatively simple for most real estate agents to hit these thresholds but be sure that you’re not mingling personal usage with your business space. The home office space you’re deducting must be used exclusively for business purposes.
How to calculate home office deduction
There are two ways to calculate the home office deduction: the simplified and traditional method. The simplified method allows you to deduct $5 for every square foot of your home office.
The traditional method allows you to deduct all the direct costs associated with your home office, as well as a portion of the indirect costs. Direct costs would include how much it cost to paint only the home office. Indirect costs include rent, utilities, insurance, depreciation and more.
Real Estate agents can benefit from the home office deduction because it can dramatically increase the number of drives that qualify for the mileage deduction. A real estate agent driving from their home to a property or from a property then returning home would usually qualify as commuting, which is never deductible. With a qualifying home office deduction, real estate agents can deduct these drives.
Rental property losses
Because of the nature of the work, many real estate agents wind up investing in property. Hopefully, it works out but that’s always the case. In fact, many landlords face rental property losses in the first few years they own a property. Thankfully, you can deduct rental property losses but there are some restrictions and limitations to be aware of.
A rental property loss occurs when the operating costs of the rental property exceed the annual rent and other money you receive from the property. With multiple properties, the annual income or losses are combined and the netted figure determines if you have a loss on your rental activities.
Rental losses are classified as passive losses, which generally cannot be deducted from income coming from your job or investment. There is an exception to the passive loss rules for real estate agents and, while it’s complex, I’d encourage you to learn more about it and see if you qualify.
Let us know your favorite deduction for real estate agents in the comments.
The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.