A real estate agent’s career comes with new daily challenges, as each property and client requires a unique approach.
During your workday as a real estate agent, you perform various business activities in multiple locations–driving to showings with buyers, attending listing appointments with potential clients, learning new management software applications, and more. Because of this variety, you may be unsure exactly what you can and cannot deduct as a business expense from your taxes.
To help with this, we have compiled a list of the most common tax deductions for real estate agents:
Deduction Commissions Paid
Often, the first question agents have is about commissions paid. The good news is commissions paid are almost always fully deductible. Generally, any commissions you pay to other agents, coworkers, or employees are deductible as a business expense on your taxes.
Deduction Home Office
You can apply several deductions if you run your real estate business from a home office. Because your home is also your place of work, you can deduct any costs that go into setting the home office up, including a desk, chair, laptop computer, etc. Additionally, you can use either the Simple Square Footage Deduction or the Itemized Deduction.
In the Simple Square Footage Deduction, the IRS offers “$5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.”
For the Itemized Deduction, an agent calculates the percentage of the square footage of the office and then applies the percentage to home expenses like rent, utilities, repairs, mortgage interest, etc.
Deduction Desk Fees
If you are working with a franchise or an independent broker, you can claim any desk fees they charge you as tax-deductible. However, it is essential to note that you would not be eligible for home office deductions when you claim desk fee deductions.
Deduction Education and Training
Any further education or training you receive can be tax-deductible. The qualifications are generally wide-reaching, but you need to follow a few specific rules. Namely, the educational course must be beyond any minimum academic courses required for a real estate agent. Also, the education or training must relate specifically to improvement in the real estate industry.
If your course or training meets these qualifications, you can deduct the direct costs of registration fees, travel, and course materials or books.
Deduction Office Supplies and Equipment
Office supplies and equipment costs add up quickly. The direct costs can stack up between furniture, computers, and copiers. You can claim these costs no matter if you also claim home office deductions or desk fees.
Many agents forget to account for telephone and internet costs, paper and stationery, and more. Also, if you buy these items new and deduct them in the same tax year, you can subtract the total cost. Or, if you deduct the items in the following years, you can receive a deduction for a depreciated portion of the cost.
Deduction Marketing and Advertising Expenses
To succeed in the real estate industry, brokerages should allocate more resources to marketing and advertising. Hiring professional marketers, real estate photographers, and website designers can be costly. Thankfully, the IRS offers a specific deduction for marketing and advertising, and the qualifications are flexible.
Deduction Standard Auto
Most real estate agents spend a good amount of their time driving, and the cost of gas is higher than usual.
Fortunately, the Standard Mileage Deduction allows you to deduct $0.56 for every driven mile. To take full advantage of this deduction, note the mileage every time you take a business-related drive.
Also, you can claim a portion of your auto insurance as a deductible expense.
Deduction Health Insurance
A quality health insurance plan is vital, but it can substantially strain your finances. According to the IRS, you can qualify for health insurance premium deductions if you pay them out of pocket.
However, you would not be eligible if you or your spouse could receive employer-sponsored health care. Therefore, checking all potential routes of obtaining health insurance plans is crucial before signing up for one.
Deduction Gifts
In real estate testimonials, many buyers and sellers cite closing gifts as a thoughtful gesture from their agents. Agents can claim gift expenses on their taxes; however, the IRS has specific rules about this process.
For each person you have given a gift, you can only claim up to $25. Items under $4, engraved with your or your firm’s name, cannot be claimed.
Additionally, receipts and explanations of purpose are required to prove the credibility of the deduction. Finally, you cannot include shipping and packaging costs in your gift deduction.
Deduction Software and Business Tools
Being a real estate agent in 2022 requires tech-savviness like never before. You probably subscribe to several software applications or business tools like Microsoft 365, Adobe Creative Suite, cloud storage, accounting programs, and more.
These tools are beneficial for facilitating and expediting many necessary tasks, but they can also come with a hefty price tag. Fortunately, you can deduct these tools from your taxes as essential business expenditures.
How does the PATH Act affect you?
The PATH Act (the Protecting Americans from Tax Hikes Act) has significantly benefited real estate professionals. The PATH Act allows real estate agents to claim business-related purchases.
Since the act passed in 2015, agents can deduct a more significant portion of their purchases, in some cases, the entire purchase. Agents across the nation benefit from the PATH Act to maximize the number of business-related deductions.
Understanding and adequately submitting tax deductions can dramatically improve your real estate business. The deductions described in this article are a great start to help you save more money.
