Self-Employed offers tips to help you keep more of your hard-earned dollars.
This article was previously published in NAR REALTOR® magazine.
Closing a real estate sale requires a big investment of your time and money. Whether expenses are business, personal, or something in between can be unclear — leading to missed deductions and overpayment of taxes.
This is key knowledge regardless of who's doing your taxes. Understanding which expenses are allowed will help you deduct with confidence and avoid overpaying on your quarterly and year-end taxes, no matter where you are in your career.
Accounting software can make your expense tracking a snap. But always consult with a qualified tax preparer, such as a CPA or enrolled agent, to determine the best tax strategy for your business.
1. Vehicle Mileage or Expense
You spend your days driving between properties and appointments. How do you determine whether to go with the standard mileage deduction or track all your auto-related expenses? If you drive 10,000 miles or more per year for your real estate business, you will most likely get the greatest tax benefit by taking the standard mileage deduction.
The IRS requires you to keep a detailed log in order to claim this deduction, which includes date, time, mileage and purpose of the trip. Mileage tracking apps can streamline this process, automatically capturing trip date, length, and time of day for easy categorization.
If you are a lower mileage driver, or have especially high car payments, the actual cost method may yield a higher deduction.
2. Marketing and Advertising
To be a success and scale their business in a predictable way, most real estate professionals invest heavily in marketing and advertising. Remember that you can deduct not only the direct cost of promotions such as business cards, flyers, signs, ads, and promos but also the production costs, such as writing and design fees, whether the materials are produced by an agency or part-time hire.
Digital and online advertising costs are quickly becoming the greatest area of spending. This includes website design and hosting fees, search engine marketing, pay per click advertising, video production, and any other IT-related costs. Be sure to track all these business expenses.
3. Home Office Deduction
Do you have a dedicated area of your home for work? If so, you’re eligible for a home office deduction even if you also have office space at your broker’s office — unless you’re deducting desk fees already (see more below). Like the vehicle deduction, the home office deduction offers an option: the regular method or a simplified method. Most self-employed people find that the simplified method maximizes their deduction. However, if you have a particularly large home office, or live in a very high-cost area, the regular method — in which you track actual expenses — may yield the highest deduction.
4. Desk Fees
Whether you are hanging your license under a national franchise or with an independent broker, your desk fees are deductible. Note, however, that if you are taking a deduction for brokerage desk fees, you will not be able to claim the home office deduction.
5. Office Supplies and Equipment
Regardless of which office deduction you take, you can claim other office-related expenses, such as stationery, photocopies, and any other consumables needed to run your business. Other large purchases that can be expensed in full – or depreciated over a number of years –include furniture, fax machines, copiers, computers, or you telephone and associated bill.
If you have a dedicated landline telephone for business, you can fully deduct this expense. Increasingly, agents are using a cell phone for both business and personal use. If you do, you are eligible to deduct only the business percentage of that expense.
6. Meals and Entertainment
There are two situations in which you can deduct meals as a business expense: when you are travelling on business and when you are dining with clients or with other professionals for the purpose of conducting business or generating referral business. In either case, you can deduct 50 percent of your total expense, which includes tax and tip for the meal. In the case of business entertainment, you are allowed to take the meal deduction only if business was discussed during the meal, or immediately before or after.
In the case of events that are provided to the general public, such as a well-advertised open house, you are able to deduct 100 percent of the cost of refreshments and food.
7. Fees, Licenses, Memberships and Insurance
Annual fees are a common costs of doing business and are deductible. In real estate, that means your state license renewal, professional memberships, and MLS dues. An important caveat with regard to professional memberships: The portion of your membership dues attributable to lobbying and political advocacy is not deductible. [For information on the deductibility of your National Association of REALTORS® dues, click here.] General business insurance and Errors and Omissions (E&O) insurance are both fully deductible business expenses. Additionally, you can deduct real estate taxes necessary for your business, but not self-employment taxes.
8. Professional Development and Travel
Given rapid industry change, continuing education is a great way to stay competitive. It’s also a requirement in most states. Many real estate professionals pursue professional development through classes, trade shows, conferences, or coaching. If you need to travel to attend an event or meet with a coach you may be able to deduct those transportation and/or accommodation costs.
9. Software and Business Tools
Any software needed to run your business is fully deductible – including lead generation subscription services such as customer-relationship management (CRM) software. Products such as QuickBooks Self-Employed not only help you automatically track your expenses and mileage, but may be fully deducted as well.