- Missing eligible deductions can mean you pay thousands extra in taxes -- your accountant can only file with the information you provide.
- Commissions paid can be the biggest write-off agents take during the year, significantly reducing taxable income.
- True profit is what agents have left over after paying expenses and taxes.
Real estate agents like you can save lots of time and money by not procrastinating on your taxes until April. To stay on top of your finances and know what your true profit is after taxes, you must have a system in place to track tax deductions because your expenses are incurred throughout the year.
Although most agents like yourself use an accountant to prepare and file your tax return, he or she won’t know how much you’re eligible to deduct — and save — if you don’t give the right information.
Knowing how much you’re eligible to take in tax deductions can literally save you thousands of dollars.
Although there are tons of deductions written into the tax code, I’ve boiled down the top three most lucrative write-offs for real estate agents that you need to take advantage of in 2016.
1. Commissions paid
Commissions you pay to other agents or brokers are generally fully deductible business expenses that no real estate agent should overlook. Commissions paid on split listings or other arrangements can add up to be your biggest tax deduction.
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Example: Esther is an agent for Southern Brokerage in Charleston, South Carolina, and this year expanded her team with her first buyer listing agent, Jake.
Esther’s contract with Southern Brokerage is a simple 50-50 split. Esther’s gross commissions for closed deals this year is $600,000. Esther’s deal with Jake is that he gets 33.33 percent of her gross commissions for any buyer listings he brings her.
Out of Esther’s $600,000 in gross commissions, Jake brought in $150,000, so she gives Jake $50,000. Therefore, on her Schedule C, Esther deducts Jake’s take of $50,000 as commissions paid expense.
Where to take it: Line 10 of Schedule C, Form 1040.
2. Standard auto deduction
You can deduct your miles as a business expense any time you use your vehicle for business, whether driving a buyer to listings, hunting around neighborhoods or even making an office coffee run.
The IRS sets the rate each year depending on market factors and other conditions, and in 2016 you can deduct 54 cents for each business mile on a car you own or lease.
This can seriously add up after hundreds of miles, but be aware that you can’t combine this deduction with actual driving expenses such as fuel and maintenance.
If you want to take advantage of this deduction, you’ll need to track your miles. People often use apps to track this kind of thing in the age of the smartphone.
Example: Patrick, a Washington, D.C.-based Realtor, drove 4,000 miles last year for his business, which can be deducted at a rate of 54 cents per mile.
Patrick could knock $2,160 off of his taxable income by taking the mileage deduction. Depending on his effective tax rate, Patrick could save a pretty significant sum of money.
Where to take it: Line 9 on Schedule C of Form 1040.
3. Home office deduction
If you regularly use part of your home to conduct business (making calls, filling out paperwork, faxing documents, etc.) you could qualify for the home office deduction.
The space has to be dedicated to your business, meaning kitchen counter, dining table or elliptical don’t count. You can take it in two ways, simplified and regular (see below for details).
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Example: Annie is a consistently top-ranked real estate agent who has a separate room in her home (200 square feet) that she exclusively uses to operate her business.
She meets the requirements for the home office deduction and opts to take the simplified deduction, which the IRS sets at $5 per square foot for up to 300 square feet.
When Annie prepares her tax return, she would deduct $1,000 (200 square feet times $5) for her home office.
Where to take it: If using the simplified method like Annie, use the instructions in Schedule C and list the total on Line 30. If you use the actual method, complete Form 8829, then list the total on Line 30 of Schedule C of Form 1040.
Are you interested in discovering even more tax deductions for real estate agents? Check out this full list of top real estate agent deductions. Or see the comprehensive tax resource for agents at 99 Deductions.
Aaron Lesher, CPA, is part of the Customer Success and Growth team at Hurdlr in Washington, D.C. Aaron also helped create a free tax resource for self-employed entrepreneurs called 99Deductions. Follow Aaron on Twitter or connect with him on LinkedIn.
