Tax Tips for Real Estate Agents
As a new real estate agent, paying taxes might be a slightly confusing experience. Whether you're working at a brokerage or you’re a self-employed agent, this guide will help you understand taxes for real estate agents and answer the question, “How do real estate agents file taxes?”
Our tax tips for real estate agents below will also outline deductions that you should know about to maximize your return - but don’t worry, it won’t be a taxing read!
1. Don't Overlook Your Deductions
Real estate agents typically qualify for a range of deductions. It's easy to overlook these deductions considering that you have plenty of expenses to write off.
We'll dig into real estate agent tax deductions in greater depth later, but for now, remember to track your potential deductions throughout the year to ease the stress that Tax Day brings.
2. Keep Detailed Spending Records
Between buying gas to drive to your open houses and meetings over lunch with your clients, you’re going to spend money in your role as a real estate agent.
Be sure to keep detailed records of what you're spending along the way. Even if it's a one-time expense, like hiring someone to clean a listing, you’ll need to add it to your expense sheet.
Many apps are available to help you keep these records without using paper. However, any form of recordkeeping is fine as long as it’s well-organized.
3. Save for Retirement
While it’s tempting to focus on what you’re earning now, remember to allocate a portion of your income toward your eventual retirement. That way, when you’re ready to leave the heyday of your successful real estate career behind, you have money available to support your retiree lifestyle. After all, those hard caramel candies that grandkids love to throw away aren’t going to buy themselves!
4. Meet Deadlines
Always meet your tax deadlines to avoid penalties. According to TurboTax, “late-filing penalties can mount up at a rate of 5% of the amount due with your return for each month that you’re late.” While the IRS might allow you to set up a payment plan if you can't pay your full tax bill, it's best to save yourself the stress and pay your estimated taxes every quarter.
5. Hire a Tax Professional if Necessary
You might be able to file your taxes yourself, especially if you’re used to filing real estate agent taxes. However, based on the average expenses and other complexities of working in this industry, you may be better off hiring a professional certified public account (CPA). Ask your fellow agents for a referral while researching local CPAs to determine which CPA might fit your needs at the best price.
Did You Know?
If you can’t submit your taxes on time, you can always file for an extension. The IRS can approve for an extended deadline, though you have to file your request before Tax Day. For more information, check out the IRS’ website.
Self-Employed Agents vs. Employees
Are you planning to work for a brokerage as an employee, or will you become a self-employed agent? Either scenario has many advantages, but how does each factor into real estate agent taxes?
A self-employed agent, also called an independent contractor, will have to file a 1040 form. These agents also file Schedule C and Schedule SE forms, the latter of which covers the self-employment tax. Since self-employment tax is still at 15.3%, self-employed agents pay more taxes in the long run than employee agents.
In many cases, agents are still considered self-employed, no matter if you have a contract with your brokerage. It all depends on if they consider you an employee. If you're not receiving regular wages and only earn money from sales, then you're definitely an independent contractor. Employee agents, on the other hand, have their taxes automatically withheld by their employer - which can make for a more straightforward filing experience.
Real Estate Agent Deductions
A tax deduction is a business expense that you can write off, giving you a chance to reduce your tax bill. That’s why it’s so important to track your potential deductions throughout the year - and to help, we’ve outlined the most common real estate agent tax deductions below.
Continuing Education and Training
Each state requires a specific number of Continuing Education credits to be completed in order to maintain your real estate license - which is good, because the best real estate agents never stop learning.
You can take award-winning CE courses directly through The CE Shop to fulfill your CE requirements while enjoying a diverse range of topics. And the best part? You can write off your CE courses and other training as a tax deduction.
Marketing and Advertising Expenses
Investing money in marketing and advertising is essential to stay competitive as an agent. All of that also takes money, which means significant tax write-offs.
Be sure to check out our marketing and advertising resources for tips and tricks on maximizing your marketing budget. The more you know, the more you can invest wisely to generate the most effective tax deductions.
Getting a commission is one of the best parts of working as an agent in real estate. Those commissions are obviously taxed, but what about commissions you pay as an agent to another agent or an employee?
You can take a deduction in this circumstance since paying out a commission is considered an expense. Unfortunately, far too many agents overlook this particular deduction. Commissions can also add up fast when they’re split between the various professionals involved in the property sale.
Don't overlook all the supplies you have to buy for your office. All of those pens, pencils, and paperclips can certainly add up to hundreds of dollars - and these business expenses can certainly be deducted from your tax bill.
Memberships, License Fees, and Insurance
Fees associated with licensing, membership to professional organizations, and paying insurance premiums could add up to thousands of dollars. Be sure to track this information so you can deduct these costs from your taxes.
And if you’re curious how much you could be saving (or spending, if you have yet to join any professional organizations), read up on our guide to real estate fees while considering the cost of membership for The National Association of REALTORS®.
That swanky outdoor barbecue grill that you bought for your client’s closing gift doesn’t have to burn a hole through your pocket - at least, it doesn’t have to burn all the way through. While the IRS lets you deduct client gifts from your tax bill, bear in mind that you’re limited to a maximum deduction of $25 when it comes to writing off these gifts. Be sure to keep all the receipts from your client gifts to maximize this deduction.
Real Estate Software Tools
You're going to need software to keep your real estate agent career thriving. Buying these tools could cost a small bundle. You can write off this expense as well, though you’ll need to keep receipts from each purchase. If you bought the software online, keep a digital receipt handy.
Use of your car to travel between listings should become a standard deduction that you take when filing taxes for real estate agents. Car maintenance costs may be deductible as well, so bear that in mind before you throw out any related receipts.
Home Office or Desk Fees
Your brokerage might charge a desk fee to work in their location. Deduct that, plus any other expenses associated with having a home office.
If you’re still wondering how to file taxes as a real estate agent, let’s take a look at the tax forms you need to complete your tax filing. Below is a list of standard forms applicable to real estate agent taxes.
On this form, you're denoting a record of miscellaneous income you've paid out in the last year. Only use this form if you've made more than $10 in broker payments or more than $600 in other forms of payment. For more details, please review this IRS webpage.
The standard 1040 reports your standard real estate agent income. It comes in three Schedules: Schedule 1 for additional income, Schedule 2 if you owe other types of tax (like self-employment tax), and Schedule 3 for claiming additional tax credits.
Through the 1040-ES form, you’ll report your estimated tax, which is important for self-employed agents. This form covers any taxes that are not automatically withheld.