Hey All. Today I’m going to talk about 5 types of tax deductions every real estate agent should know about.
As a real estate agent, you will have the “normal” kinds of expenses available (like office supplies and meals) but there are a few other kinds of expenses that need a little deeper look.
Understanding these types of tax deductions is also a great way to open up your mind when it comes to other expenses. As an example let’s look at your meals deduction.
If you take a client or referral source out to lunch and get sandwiches, you can deduct the cost of the meal and tip on your return, but tax law only allows you to take 50% of the total spent.
Now let’s pretend instead of taking a client out for sandwiches, you bought a bunch of sandwiches to serve at an open house. Same exact expenditure, but you now get to deduct the entire amount.
The tax code is full of little weirdnesses like that. So without further stalling, here are 5 tax deductions for realtors.
1. Open House Expenses:
A. Advertising:
- Website Development and Maintenance: Costs related to creating and maintaining a professional website are deductible. Don’t forget costs of SEO (search engine optimization) and other organic traffic costs.
- Print and Digital Advertisements: Expenses for designing and publishing advertisements in newspapers, magazines, online platforms, and social media can be deducted.
- Business Cards and Promotional Materials: The cost of printing business cards, brochures, and other promotional materials are deductible.
B. Staging Expenses:
- Hiring a staging company is a big expense. This is fully deductible.
- Some agents actually do their own staging. The money spent is classified in two ways:
- Items that have a useful life of longer than a year (like tables, chairs, beds) should be depreciated over 7 years. Don’t worry. If you have sufficient income or just need to take the whole expense, you can take advantage of either bonus depreciation or Section 179 and take the whole shebang as a deduction in the current year.
- Knick knacks, little things, stuff that might give the home a “homier” feel I advise taking as staging supplies. This stuff generally isn’t used over the course of multiple years and is fully written off in the year you bought it.
- What about storage of these items? It’s not weird to rent a storage site and move your staging materials in and out as needed. But what if you store your stuff at home? That would be a home office deduction and we’ll talk about that later on in this article.
- Staging can be a huge tax deduction for realtors, so make sure to keep good records.
C. Catering, snacks, other food and drink:
- Anything you buy to serve to visitors and prospects is deductible in full.
- What if you make cookies and pastries at home? Unfortunately you can’t “pay” yourself for all the baking, and the home office for the kitchen isn’t available since a requirement for the use of a home office is the office must be used exclusively and primarily for your business. The kitchen won’t qualify since you don’t use it exclusively for your business.
2. Transportation and Travel Expenses:
As a real estate agent, you are constantly on the road for one reason or another. But there are some things to watch:
A. Vehicle Expenses:
- To write off your car, it must be used for your business by more than 50%. The only way you will know the actual usage percentage is by tracking your mileage. If you use QuickBooks online to track your business books, they offer an app to load on your phone that uses GPS info to track your movements.
- I actually recommend an app called MileIQ. It costs $60/year and it’s totally worth it. I suggest to my clients that they go online every week (to the mileiq.com site) and allocate the trips captured during the week to either business or personal. That way you’ll have detail of all your driving and we can properly figure your auto expense.
- Fuel, Repairs, and Maintenance: Costs for fuel, oil changes, repairs, and maintenance for your vehicle used in business activities can be deductible. By tracking your mileage, we can determine if taking your actual allocated costs or taking the mileage deduction ($0.655 per mile for 2023), whichever is higher.
- Insurance and registration fees are treated the same as repairs, gas, etc… Signage for your car would be fully deductible as advertising.
B. Travel Expenses:
- As a tax deduction for realtors, travel for seminars and classes are fully deductible. This includes flights, hotels, weird airport fees (everyone has their hand out), Uber/car rentals and tipping to name a few. Meals are still generally deducted at 50%.
- Travel to “find” property. The only way to write off travel expenses to look for investment property is if you actually buy a property where you traveled.
- If you are traveling to find investment property for a client, I would take this as an expense even if the client doesn’t buy based on the trip findings. The client can’t deduct the costs.
3. Home Office Deductions:
This one is really on an individual basis. Not everyone who has a home office is qualified to take the deduction.:
A. Qualifying for a Home Office Deduction:
- Exclusive and Regular Use: To qualify, your home office must be used exclusively and regularly for your real estate business.
- Principal Place of Business: The home office should be your primary place of business where you meet clients and conduct administrative tasks.
- Because a lot of brokers have desks for their agents to work from, you may not qualify because it won’t be your primary place of business. Some brokers may even charge you a “desk fee”. Depending on this fee and your actual housing costs, it might not be a bad thing since this fee is fully deductible.
B. Deductible Expenses for a Home Office:
- If you take a Home Office deduction, you must track all of your home occupancy costs in full. We then calculate the expense based on the square footage of the house and the square footage of your office area. So if you have a 1,000 sq ft home and your “office” is 100 sq ft, you would get to expense 10% of your total occupancy costs.
- So what do you track? The basics are:
- Mortgage interest or rent.
- Property taxes (if paid)
- Fire or renters insurance
- Utilities which include gas and electric, garbage, sewage, telephone/internet.
- If you meet clients at home and have someone come clean every week, that’s a deduction. If they only clean your office, that’s fully deductible. If they clean the whole house we allocate based on square footage.
- What about a gardener or repairs? If you meet clients regularly at home, gardening will be allocated as above. Otherwise no. Repairs are categorized as either direct or indirect. Direct would be something in the actual office. Indirect would be repairs to the house, but these might not be deductible at all. These would be a case by case issue to be discussed with your tax preparer. Business purpose will be the deciding factor.
- Home Office Equipment and Supplies: Deductible expenses include furniture, computers, printers, and other supplies necessary for your home office. These expenses would be fully deductible as if you had an office elsewhere.
- If your broker gives you desk space in their office, this would not be a tax deduction many realtors could take.
4. Education and Business Coaches
This is a tax deduction in which successful realtors invest heavily.
A. Seminars and conferences:
- These are fun AND deductible. And they don’t necessarily have to be strictly about selling real estate. Learning business knowledge is your line. Marketing, writing skills, presentation skills…I’d even toss things like self improvement seminars (think Tony Robbins) and the like are generally taken to improve their ability to get business. All deductible.
- Continuing education is fully deductible. This is required to keep your license so there is no question as to its deductibility.
- Travel and such is all deductible as outlined above. But you can’t expense travel for your family if they go along for the ride. If your significant other also works in the business there may be an avenue to deduct their costs if they attend the conference or seminar with you.
B. Coaching, Courses and Mastermind Groups:
- This stuff is expensive and also fully deductible. Once again, it doesn’t have to be specifically related to real estate and a lot of times, doesn’t sound even related to business. But your mindset has a big effect on your success (again, think Tony Robbins)
- If you buy a product at a seminar, webinar or any kind of conference, chances are good that this can be deducted. Educating ourselves to be better at business can look like a lot of things. If a course helps you in business, take the deduction.
- Mastermind groups cover a lot of info, but generally they are groups you can run thoughts and plans by a bunch of other people and get feedback. They are moderated and led by someone with a lot of knowledge in the groups reason of being. Mastermind groups start at $5k and I’ve seen invitation only groups that cost $100k a year.
5. Technology and Recordkeeping Costs:
This is kind of a catch-all category. Both are essential to success yet both are forgotten and relegated to the “Ask My Accountant” category in QuickBooks.:
A. You Gotta Do Your Bookkeeping:
Keeping detailed records of your expenses and receipts is crucial for substantiating your deductions during tax audits. I suggest QuickBooks Online. Their starting plan would be be more than enough, and there is always some sort of discount available.
Get one of those accordion folders that’s divided up by the months. That way you can simply put any receipts or other paperwork in the appropriate month so you can find it later when you are doing your books. .
B. Utilizing Technology for Efficient Record-Keeping:
QuickBooks Online has all kinds of real estate based apps that you can use to integrate with your QuickBooks records. From CRM (Customer Relationship Managers) software to access to MLS or appraisal apps (not Zillow, but similar). Depending on your needs, there is bound to be something that will make your life a little easier.
Conclusion To Tax Deductions for Realtors:
I’ve never met anyone who likes to pay taxes. The best way to ensure that you aren’t paying any more than you are legally responsible for is to spend time each week going over what you spent, what it was spent on, your auto mileage, your meals out…and it usually won’t take much more than an hour or so. Probably less.
This is the stuff that people tend to avoid. The fear of the unknown, the fear of doing something wrong. Just fear. What if I’m not doing well? Then what? What if I’m doing better than I thought and I’m now going to have a big tax bill? Holy crap1 The horrors!
It’s not horrible and you can do it. Look at it this way. You passed the Real Estate Agent test and that took time to learn the rules and regulations you have to abide by. Tracking your expenses and mileage will be a piece of cake compared to that.
You got this!