Realtor Tax Deductions Strategies

As a REALTOR, your primary focus is often on making money by closing deals and growing your client base. However, it’s just as important to keep the money you earn and ensure it works for you.

It’s not just about finding deductions; there’s a whole world of tax optimization techniques to explore. That’s where savvy tax strategies come into play. Understanding and implementing the right tactics allows you to keep more of your hard-earned income after tax day.

In this article, we’ll introduce you to some of the best tax strategies designed explicitly for REALTORS , helping you maximize your income and minimize your tax liability. Get ready to take control of your financial future and make your money work for you.

Claim your ERC tax credit for real estate brokerages

Most real estate brokerages saw their businesses take off in 2020 and 2021. Still, some may have seen revenues drop and are eligible for a large Employee Retention Credit (ERC). We mention this credit first because it could be worth much more than all your tax deductions combined.

A small business of just five employees could claim more than $200,000, even if you didn’t pay that much in taxes.

The credit was designed to help businesses stay afloat while keeping employees on payroll during the pandemic. Businesses can still claim the credit until around April 2025 by amending 2020 and 2021 tax returns.

To be eligible for the ERC, your business operations have been fully or partially suspended due to a government order related to COVID-19 or you’ve witnessed a considerable plunge in gross receipts in 2020 or 2021 compared with the same quarter in 2019.

To claim the ERC credit, don’t go it alone. Get the help of an experienced CPA with knowledge of how to legally get your maximum credit.

Top 15 tax deductions as a self-employed REALTORS

There are many tax deductions available to help you save money as a REALTOR who is self-employed. Let’s look at the top 15 deductions that REALTORS  can take advantage of.

1. Home office furniture: You can deduct the cost of furniture used exclusively for your home office. This includes desks, chairs, filing cabinets, and other necessary items. (Schedule C, Box 18)
2. Property repairs: If you make any repairs or improvements to rental properties you own, you can subtract the cost of those repairs from your taxes. (Schedule C, Box 21)
3. Power bill: If you use part of your home as an office, you can deduct a portion of your power bill from your taxes. (Form 8829)
4. Self-employed health insurance deduction: You can deduct premiums paid for health insurance coverage for yourself and your family members if they are not eligible for coverage through an employer-sponsored plan.
5. Subscriptions: You can deduct any subscriptions related to running your business, such as trade journals or magazines related to real estate or other professional services that provide knowledge and insight into the industry.
6. Training and education expenses: Any fees associated with taking classes or attending seminars related to real estate can be deducted from your taxes as long as they are related to improving or maintaining skills required in real estate sales and brokerage services.
7. Marketing expenses: Any costs associated with marketing yourself as a realtor, such as advertising materials, website development, hosting fees, etc., can be subtracted from your taxes up to certain limits set by the IRS each year.
8. Office space expenses: If you rent an office space outside of your home specifically for conducting business activities such as meeting clients or holding open houses, then you may be able to deduct some of these costs from your taxes depending on how much space is used exclusively for business purposes versus personal use throughout the year.
9. Real Estate License Expenses: The cost of obtaining and renewing a real estate license is deductible on Schedule C when filing yearly taxes.
10. Equipment and Supplies Expenses: Any supplies purchased specifically for conducting business activities, such as computers, printers, scanners, etc., can be deducted from taxable income up to specific limits.
11. Travel Expenses: Any travel expenses incurred while conducting business activities, such as attending conferences or visiting potential clients, may be deductible depending on how much time was spent away from home during these trips.
12. Professional Services Fees: Fees paid to attorneys, accountants, consultants, appraisers, etc., who provide professional services related to running a successful real estate business may also be deductible.
13. Insurance Premiums: Certain insurance premiums paid throughout the year may also qualify for deduction depending on what type of policy is being purchased.
14. Commissions Paid: Commissions paid out by a broker or agent over the year can potentially qualify for deduction when filing taxes.
15. Meals & Entertainment: A portion of meals and entertainment costs incurred while entertaining clients or networking with others in the industry could also qualify.

Find a CPA-slash-tax ninja

Finding the proper CPA-slash-tax ninja to help you with your small business taxes can be daunting. But, with the right strategy, you can find the perfect fit for your business.

• Ask around in Facebook groups and other online forums: This will give you an idea of who other small business owners are using and their experiences. Be sure you focus on CPAs for REALTORS , though.
• Google “CPA for REALTORS  near me”: See if any CPAs specialize in your type of business. This will help narrow down your options and make it easier to find a CPA who knows the intricacies of this particular small business type.
• Ask other similar small business owners who they use: Get an honest review of their experience. This will give you an inside look at how a particular CPA works and whether or not they would be a good fit for you and your business.

Check if you can write off all rental property losses

As a full-time real estate professional, you may be able to write off the entire loss on rental properties, including depreciation.

This advantage is not available to those who are landlords on the side. According to the IRS, to qualify as a “real estate professional,” you must meet specific criteria:

1. More than 50% of your services during the tax year
2. Worked more than 750 hours in real property trades or businesses in which you materially participate

If you meet these requirements, you can deduct your rental losses without limitation against your non-rental income. This can result in substantial tax savings, especially with significant rental losses.

Business-specific tax strategies for self-employed REALTORS

1. Passive Activity Loss Rules

If you have multiple rental properties, consider grouping them as a single activity for tax purposes. This may allow you to offset losses from one property against gains from another, potentially reducing your overall taxable income.

2. 1031 Exchanges

Consider using a 1031 exchange to defer capital gains taxes when selling investment properties. By reinvesting the proceeds from the sale into a like-kind property within specific timeframes, you can delay paying taxes on the capital gains.

3. Cost Segregation Studies

Conduct a cost segregation study to identify assets within your rental properties that can be depreciated faster than the building itself. Accelerating depreciation on these assets can reduce your taxable income in the short term.

Donate business assets to charity

Donating business assets to charities is not only advantageous in reducing your tax burden but also an excellent way to help those less fortunate while simultaneously gaining exposure for your company. The result? Positive publicity enables you to expand and further solidify the reputation of your business!

For example, you could donate office furniture or technology equipment no longer needed to a local non-profit organization that helps low-income families find affordable housing.

By promoting your involvement and donation on social media or through the local press, you can build goodwill and attract potential clients who value businesses that give back to their community.

Buy a home

Homeownership can offer several tax advantages, including to REALTORS . Some of the tax benefits associated with homeownership are:

• Mortgage Interest Deduction: Homeowners can deduct the interest paid on their mortgage for their primary residence and a second home, subject to certain limits. This deduction can lower your taxable income, reducing tax liability.
• Property Tax Deduction: Homeowners can deduct their property taxes up to a combined limit of $10,000 for state and local taxes (SALT), which includes property, income, and sales taxes.
• Home Office Deduction: If you use a portion of your home exclusively for your real estate business, you may be eligible for a home office deduction. This deduction allows you to write off a percentage of your home expenses, such as mortgage interest, property taxes, utilities, and maintenance costs, proportional to the square footage of your home office.
• Capital Gains Exclusion: When selling your primary residence, you may be able to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from your income as long as you have lived in the home for at least two of the previous five years.

Pro Tip: If you often write off many expenses and worry that it may impact your eligibility for a mortgage, there are tailored mortgages just for people like you. You can now access the financing necessary to achieve homeownership regardless of deductions.

• DSCR Loans (Debt Service Coverage Ratio): This type of loan evaluates the ability of the property to generate enough income to cover the mortgage payments. The focus is on the property’s income rather than the borrower’s income.
• Bank Statement Mortgage: Instead of using tax returns, this program allows lenders to verify your income based on bank statements. This can be helpful for self-employed borrowers who have significant business write-offs that may lower their taxable income.
• 1-Year Self-Employed Mortgage: This program requires only one year of tax returns or financial statements, making it suitable for those with shorter business histories.
• Bank Statement 2nd Mortgages: Similar to a Bank Statement Mortgage, this second mortgage option allows you to use bank statements to qualify for additional financing on your property.
• No-Doc Liquidity-Based Loans: These loans require minimal documentation and focus on the borrower’s liquid assets. Borrowers with substantial savings or investments may be eligible for this type of loan, even if their taxable income is low.
• 1099 Mortgage: This program is designed for self-employed borrowers who receive 1099 income instead of a traditional salary. Lenders will use your 1099 income statements to determine your eligibility and loan amount.

Switch from sole proprietor or LLC to S Corp

Switching your business structure from a sole proprietorship or an LLC to an S Corporation can save you money on self-employment taxes, specifically Social Security and Medicare taxes.

As an S Corp, you can take a portion of your income as distributions rather than salary, and distributions are not subject to self-employment taxes. However, you must still pay yourself a reasonable salary for your services, subject to payroll taxes.

Working with a knowledgeable CPA can help you navigate the transition process and potentially save you significant taxes during the first year of operating as an S Corp.

Deduct startup costs

You can deduct certain startup costs from your federal taxes when starting a new business. According to the IRS, startup costs include expenses incurred before your business begins operating, such as:

• Market analysis or research
• Advertising and promotional costs
• Travel and employee training expenses
• Legal and accounting fees

You can deduct up to $5,000 of startup costs in the first year of your business, and any remaining costs can be amortized over 180 months, beginning with the month your business starts operating.

Keep detailed records and receipts of all startup expenses to claim these deductions accurately.

Contribute to a retirement plan

You can create and contribute to your retirement plan. This opportunity allows you to save some of your income while enjoying tax breaks securely.

There are several types of retirement plans available for self-employed individuals, including:

• Simplified Employee Pension (SEP) IRA
• Savings Incentive Match Plan for Employees (SIMPLE) IRA
• Solo 401(k)
• Individual Retirement Account (IRA)

Each plan has its contribution limits and rules, so it’s essential to research your options and choose the one that best suits your needs.

Vehicle and mileage deduction

Self-employed REALTORS  and other professionals who use their vehicles for business purposes more than 50% of the time may qualify for vehicle-related deductions.

Under Section 179 of the IRS code, you can write off the cost of a vehicle weighing more than 6,000 pounds but less than 14,000 pounds if used for business.

Eligible vehicle models include heavy SUVs, trucks, and vans. Check the manufacturer’s specifications to verify the vehicle’s weight before purchasing.

Eligible vehicle models may include:

• Dodge Durango SRT
• Bentley FlyingSpur V8
• BMW X7 M50d
• Audi SQ7
• Ford Expedition
• Land Rover Discovery Sport
• Land Rover Range Rover
• Mercedes-Benz GLS 6004MATIC
• Toyota 4Runner 2WD/4WD LTD

It’s important to track your mileage throughout the year to maximize deductions. Utilizing an app for this makes it simple and convenient to find your total at the end of each tax season!

Claim depreciation

Large business assets, like office equipment and vehicles, depreciate over time, and you can claim this loss on your taxes.

The IRS allows businesses to depreciate assets using the Modified Accelerated Cost Recovery System (MACRS), which allocates a portion of the asset’s cost over its useful life. Claiming depreciation can lower your taxable income and reduce your tax liability.

Consult a tax professional to determine the appropriate depreciation method and schedule for your business assets.

• Self-employed mortgage programs
• Refi, Cash-Out Refi, and Purchase
• Primary, Second, Investment Homes
• No tax returns

Get Qualified

Deduct health insurance costs

One of the tax advantages of being self-employed is the ability to deduct health insurance premiums for yourself, your spouse, and your dependents. The deduction can help offset the often high costs of obtaining health insurance as a self-employed individual.

The self-employed health insurance deduction is an above-the-line deduction. It reduces your adjusted gross income (AGI) and is available even if you don’t itemize your deductions. You can claim this deduction on IRS Form 1040, Schedule 1.

See if you qualify for Section 199A Qualified Business Income Deduction

The Section 199A Qualified Business Income (QBI) Deduction is a tax benefit for individuals who are self-employed and owners of pass-through entities, such as sole proprietorships, partnerships, and S corporations.

This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income.

To determine if you qualify for the QBI deduction, consider the following factors:

• Your taxable income: The deduction is subject to income limitations, and the amount you can deduct may be reduced or phased out if your taxable income exceeds certain thresholds.
• The type of business: Some businesses, known as “specified service trades or businesses” (SSTBs), may have additional limitations on the QBI deduction based on the nature of their services.

To claim the QBI deduction, you must complete Form 8995 or Form 8995-A, depending on your taxable income and the complexity of your business situation.

For more information on the Section 199A Qualified Business Income Deduction, visit the TurboTax form.

Hiring employees – W2 or 1099

Deciding when to hire help depends on your business needs and goals.

If you struggle to keep up with your workload or feel you’re missing out on growth opportunities, it might be time to consider hiring additional help.

Hiring employees or contractors can help you scale your business and increase revenues while potentially offsetting some of your tax obligations.

Which is better to hire? W2 or 1099?

The decision to hire W2 employees or 1099 contractors depends on various factors, including the level of control you want over the work process, the nature of the work, and the financial implications for your business. Let’s take a look at some key differences:

W2 Employees:

• Greater control over work processes and schedules
• Employee benefits, such as health insurance and retirement plans, can help attract and retain talent
• Subject to payroll taxes, workers’ compensation, and unemployment insurance
• Requires adherence to labor laws and regulations

1099 Contractors:

• Less control over the work process
• No obligation to provide employee benefits
• Doesn’t require payroll taxes, workers’ compensation, or unemployment insurance
• Fewer labor law requirements and regulations

Be smart with your income

Don’t let Uncle Sam take more than he’s entitled to.

Get smart about taxes and keep more of your money in your pocket. Learning about tax deductions, credits, and strategies specific to your business can minimize your tax liability and maximize your savings.

Consider working with a tax professional who understands the nuances of your industry to ensure you’re taking full advantage of available tax benefits.

My Perfect Mortgage does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. Consult advisors before filing taxes or engaging in any transaction.