9 Ways Realtors Can Reduce Their Tax Bill

Do you know the 9 ways realtors can reduce their income tax bill? Is the IRS a dreaded agency that is working against the taxpayer?

Tip #1: Gather Your Records

To start, you’ll need to have all of the relevant documents on hand. This is especially important if you’re trying to maximize your deductible income. You’ll need documents and copies of the following:

• Copies of your receipts (scan or copy them if they may fade)
• Business earnings
• Business expense lists
• Deductions 
• Calendars, logs, etc.

Tip # 2: Determine Your Status: Are You Self-Employed or Employed? 

The vast majority of real estate agents are considered to be self-employed, rather than an employee. This impacts how taxes will be paid. Here’s the difference:

• If you are an employee, your taxes are automatically withheld by your employer. That money is already subtracted from your earned wages and paid to the government. When you’re an employee, tax filings help to ensure that your employer has paid the correct amount in taxes out of your wages. 
• If you are self-employed or an independent contractor, you’ll need to make quarterly tax payments, declaring your earnings throughout the year.

Filing Taxes as a Contractor or Self-Employed Real Estate Agent

When you’re a self-employed real estate agent, you’re responsible for filing a few more forms to ensure you’re paying the correct amount of taxes:

• 1099-NEC – This form replaces the 1099-MISC and is essentially the W-2 for self-employed real estate agents. Your broker will give you this form every year to indicate how much money you made working as an independent contractor.
• Form 1040 – This is your annual tax return form. You’ll use it to report individual income tax as well as a few other sections such as:
  • Schedule SE will be used to help you calculate your self-employment taxes
  • Schedule C will be used to calculate your net profit.

• Beware of common errors, such as:
  • Not being up to date in all the new laws and their effective dates, plus when they start and when and if they expire.
  • Miscalculations – Math mistakes
  • Taking 100% of an expense when there can be personal usage (i.e., phone, computer, vehicle)
  • Misspellings (particularly for names) 
  • Missing or illegible name or address
  • No signature or return date
  • Not including relevant schedules
  • Not including a postage stamp (if mailing your return)
  • Forgetting to make the check payable to the US Treasury
• Wrong taxpayer ID number – If your taxpayer identification number is incorrect or absent, your taxes will be unable to be filed.
• Underreporting – Failure to report all of your income can result in significant fines and penalties. 
• Underpaying taxes – See Tip #5

Tip #3: Include Allowable Deductions 

As a real estate professional, you can deduct many expenditures related to your business activities. 

You mustn’t solely focus on large purchases. There are plenty of minor expenditures that can also be deducted and which add up quickly. In addition, some deductions aren’t directly related to your daily business but are still considered allowable deductions by the IRS. For example, common deductions you should look into include: 

• Education – As a real estate agent, you need to stay current on the market and learn new strategies to help better serve your clients. This can involve education.
  • Real estate training classes
  • Continuing education classes
  • Coaching 
• Marketing – Any campaign materials you use to attract homeowners are allowable deductions. This includes business cards and mailers, open house signs, sale flyers, and more. 
• Digital marketing and advertising – Whether it’s building a website or running digital or social ads, investments in your digital marketing are also deductible.
• Travel
  • Overnight meals
  • Lodging
  • Travel
  • Rental Cars
  • Cabs & other public transportation
• Transportation – If you use a vehicle for work purposes, related expenses can be deducted. This includes: 
  •  Maintenance
  •  Gas
  •  Mileage
  •  Insurance
  • New car purchase
  • Cost to lease
• You may be able to gain significant tax benefits from buying or leasing a vehicle, either personally or in your business. For instance, the IRS has made it easier to depreciate the value of luxury SUVs, vans, or trucks, increasing the potential tax deduction. Having the right vehicle can make a big difference in your tax planning. Reach out to your tax pro to discuss the potential tax advantages before buying or leasing a new vehicle for business purposes.

• Licensing – Renewal and licensing fees that are categorized as work expense are deductible.
• Dues (associations, MLS) and Subscriptions (trade publications).  If you have an outside-the-home office space (see below) and it has a waiting area, most publications will be allowed.
• Computer-related items, including cell phones
  • Has to be used more than 50% for business, then only that part is deductible.
• Home Office
  • Direct Expenses
  • Indirect Expenses
  • Actual versus “Safe Harbor”
  • No home internet or Wi-Fi unless you have separate lines
• Insurance – In all likelihood, you carry general liability and professional liability insurance to protect yourself from the inherent risks of interacting with third parties and providing professional advice. If you have your own policy—one not covered by your brokerage—you can deduct it. 
• Gifts – Gifts are limited to $25 per person per year. If the client is a couple, it’s $50 per couple per year. If you purchase a larger gift for an important client, be sure only to count $25 per person towards taxes.  
• Meals and Entertainment
  • Entertainment, for any reason, is no longer deductible
  • Business meals
    • What is the definition of a business meal?
    • What is the percentage of deductibility?
    • What is the definition of entertainment, and can they be combined with deductible meals?

Tip #4: Include Tax Credits 

Depending on your total income, real estate agents may also be eligible for tax credits. 

There are dozens of potential credits. Of course, what you choose will be contingent upon your financial and personal situation, and it is advisable to speak with a tax professional for guidance. That said, common tax credits you might consider include: 

• Earned income tax credit – Do you make less than $57,414 per year? If so, you may qualify for a general credit to reduce the taxes you owe (also depends on how many children or relatives you “claim”).
• Child tax credit – If you have kids, you may be able to qualify for up to $3,000 in tax credits per child. It is also $3,600 for each qualifying child under 6 and $500 for any other dependents.
• Dependent care – If you pay for childcare or adult care, you can receive 20-35% off of $3,000 or up to $6,000 for two children or more, in total care costs.
• Saver’s credit – If you paid into your retirement account, you might qualify for a 10%, 20%, or 50% credit, depending on your income level (must be less than $66,000 for 2021). The credit is off of a maximum of $2,000 in investments.   
  • NOTE – Rollovers do not count for this credit
• Education credits – Do you have children in higher education? If so, there are tax credits up to $2,500 if you have students in graduate or undergrad programs. 

Tip #5: Do Not Fall Behind

• Make sure that you are current in your estimated tax payments (or federal withholdings if you are an employee of your own S-Corporation).
• If you fall behind, you have to pay the tax due with the return or extension.
  • Extensions are an extension to file, not to pay.
  • You will be subject to the Failure to Make Estimated Tax Payments
    • To avoid this assessment, you have to make these payments on time (4/15, 6/15, 9/15, and 1/15 of the next year). They must be on time and equal to ¼ of 100-110% of your prior year’s tax or 90-95% of your ultimate current year’s tax.  If you paid less than what you should be paid on these dates, you could still be subject to this added assessment.
    • If you do not pay any balance due with the extension or the return, you will be subject to the late paying penalty of ½% per month of what is owed on the return.
    • If you do not file your return by the original due date (4/15) or the extended due date, you are subject to the late filing penalty of 5% per month.
    • The late filing and late paying penalties and any interest assessed are on the tax due with the return.

Tip #6: Set Up a Separate Legal Entity

• Create a separate entity for your real estate business
  • Incorporating can deliver significant tax benefits while providing legal protection in the event of a lawsuit. You can reduce your self-employment taxes by forming a corporation.
  • An attorney or Enrolled Agent can help you file all the documents, including notifying your broker and the Florida Real Estate Commission (FREC) of the change.

Tip #7: Open a Qualified Retirement Account

• Open a qualified retirement account An Individual Retirement Account (IRA), SEP-IRA, and Roth IRA are among the options.
• Every dollar you contribute is subtracted from your gross income, cutting your immediate tax liability. Plus, your invested dollars can grow tax-free until you withdraw the money in retirement when your income (and tax obligations) are likely to be lower.

Tip #8: Hire Your Child

Hire a teenager, parent, or another family member to perform office tasks and pay a reasonable salary or wage.

• The dollars you pay an employee are subtracted from your gross income, reducing your tax payments.

Check with your tax professional to determine if it makes sense to hire a family member as an assistant for tasks such as picking up signs, delivering documents, maintaining listings, or providing professional services.

Tip #9: The Taxpayer vs. The IRS

• Liens and Levies
  • “Old Wives Tale” – Liens and levies are assessed on one particular asset, like a home, commercial property, rental property, a vacation home, or even your car, boat, or plane.
    • Liens are assessed against the taxpayer(s) social security number. It is not against any one asset. 
    • You may not even know you have a lien placed against you or your seller/buyer until the title company does a title search. Not easy to get a lien released, withdrawn, or subordinated.  Also, it can take weeks, if not months. So, the earlier a tax pro gets involved, the better. It can and most likely will hold up the closing if it is not addressed early enough.
• Revocation of a passport
  • The IRS certifies seriously delinquent tax debt to the State Department. Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt (including interest and penalties) totaling more than $54,000 (adjusted yearly for inflation) for which a:
    • Notice of federal tax lien has been filed and all administrative remedies under the law have lapsed or have been exhausted, or
    • Levy has been issued
• Is bankruptcy an option?
  • You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met:
    • • The debt is for federal or state income tax
        • Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy.
        • Your tax debt is at least three years old.
        • The tax must have been “assessed” by the IRS 240 days before you file the petition.
        • Check with a bankruptcy attorney and your Enrolled Agent to determine if bankruptcy is a good option for you.

Bonus Tip 1: What options do you have if you cannot pay your tax liability or have unfiled tax returns?

 The most common options are:

• Full Payment: paying the amount on the tax notice and avoiding the confrontation with the taxing authority. Most of the time, this option is not the best option for the taxpayer to resolve their tax problem, as often the tax bill is inaccurate.
• Pay the Correct Tax Only: paying the actual amount of taxes if you can afford it is usually a good solution to your tax problem. This will entail working with the taxing authority to abate the penalty assessed. The success of penalty abatement is based on reasonable cause and not willful neglect.
• Installment Agreement: paying the tax amount through an installment agreement is a common way to resolve your tax problem. You should seek professional tax advice, as the taxing authority will usually request a large monthly payment, while professional taxpayers’ representatives will work on attaining a reasonable installment agreement, and you can live without causing a financial and economic hardship on you and your family.
• Offer in Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal to or exceeds the taxpayer’s Reasonable Collection Potential, RCP.

Bonus Tip 2: Banking? Are you using your account correctly, or are you setting yourself up for an IRS disaster?

Although having two bank accounts appears inconvenient, you shouldn’t use a personal account for your business finances primarily because it can affect your legal liability.

• Reasons why you should keep your business and personal banking separate:
• Ease of tracking business transactions
• Leaves a clear audit trail
• Accurate cash flow management
• Establishes business professionalism
• Builds your business credit score

Bonus Tip 3: Crypto and Filing Taxes – The Crypto Tax Nightmare

Basically, crypto investors have no idea what they’re doing. And it appears that the same problem will come into play this year regarding NFTs, or non-fungible tokens. Generally speaking, cryptocurrency is treated as property and taxed accordingly. Unfortunately, this means that you’ll face tax implications when you sell your crypto or NFT, or you trade either one for another investment or even use them for a purchase. 

The IRS wants you to report your crypto gains. You can report crypto losses too, but the IRS doesn’t care about them. The government still seems to think millions of transactions and dollars might still be unreported. You might think you won’t be caught, but the risks are growing.