Name: Perry Chyo & Company
Price range: $$$

Solo 401(k) or SEP IRA: What are the differences! Two Big Reasons A Solo 401(k) Is Better.

I’ll admit. This retirement stuff can be confusing. I mean really confusing.

401K’s, IRA’s, wait…there are more than one kind of IRA? SEP IRA? ROTH IRA? ROTH 401K?? What are they trying to do to you!?! How do they compare? Why are there so many plans!? Is there really a difference in a Solo 401(k) or a SEP IRA?

To keep the confusion to a minimum, let’s look at two available options and how they would fit into your retirement plans.

Let’s compare a Solo 401(k) or SEP IRA.

Let’s lay the foundation. We’ll be looking at Tom & Steph. Steph is an orthopedic surgeon and Tom manages Steph’s medical practice. They have no employees currently but that could change. Steph does well and brings in around $600k per year. They have very little in the way of overhead expenses. Let’s say 10% of receipts.

I’ll also be comparing the Solo 401(k) or SEP IRA plans with the business in a corporation, and as a sole proprietor.

I. Solo 401(k)

This plan is a combination of a 401(K) plan and a SEP IRA. The first part is a 401k, similar to what you may participate in working at a larger company. 2023 401k contributions are limited to $22.5k with a catch-up provision of $7,500 for those over 50. The company can then match up to 25% of W2 wages as a SEP Contribution. With the catch-up contribution, you are limited to $73.5k in total contributions.

A. Eligibility and contribution limits: Solo 401(k) plans are often referred to as a Married 401k since you must be self-employed with no full-time employees other than your spouse. Limits for the Solo 401(k) are higher than other retirement plans due to the dual nature of the plan types. For 2023, the maximum contribution limit is $62,500 ($73,500 if you’re age 50 or older).
B. Employee and employer contributions: One of the advantages of a Solo 401(k) is that it allows both employee and employer contributions. As an employee, you can contribute up to $22,500 ($26,000 if age 50 or older) in 2023. Additionally, you can make employer contributions of up to 25% of your net self-employment income.
C. Tax advantages: Contributions through payroll and profit sharing (SEP) reduce taxable income in the corporation. With a maximum tax rate of 21%, you can expect to save at least 21% on your contributions.
If you are a Sole Proprietor, contributions are deductible against all income but the calculation is based on net self employment income. Since the max tax rate for an individual is 37%, you could conceivably save up to 37% on your contributions.
D. 401K and borrowing against your balance: As with regular 401k plans, you can “borrow” from your balance. You must pay this back just like you would if you borrowed from a bank. Most of my exposure to people borrowing against their 401k were taxpayer borrowing the funds as a down payment on a new home.
E. Sole Prop vs Corp: Here’s where they differ the most. If the business is in a corporation as shareholders you must be on payroll. The contribution is determined by how much you were paid through payroll. Since many S Corp owners also take distributions (which are not part of the calculation), the amount you can contribute may affect total payroll taxes.

If your business is a Sole Proprietorship, the calculation is based on your net income. This may allow you to contribute more vs. a corporation, but you won’t get the employment tax savings if contributed via payroll.

Now let’s take a look at the SEP IRA part of our 401(k) vs SEP IRA comparison

II. SEP IRA

This is the “not 401k” part of a Solo 401k plan with different limits. A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is another retirement savings option generally for self-employed individuals. The total contribution limits are the same as a Solo 401k.

A. Eligibility and contribution limits: The biggest difference between the two plans is the ability to have employees other than your spouse on payroll. The contribution calculation as a sole proprietor is 20% od net self employment income.

The biggest difference is calculating as an employee of your own corp. The calculation is still 25% of your W2 wages. To contribute the max SEP in a corp, you must have $264k of wages. Compared to a Solo 401k,, your W2 wages need to be $174k (after the Solo 401k employee contribution) for a total of $204k in wages.
B. Employer contributions: A SEP IRA is a fully employer based contribution. There are no catch-up provisions with a SEP so the max contribution allowed is $7,500 less (the catch-up provision allowed with e 401k contribution).
C. Tax advantages: Contributions made to a SEP IRA are tax-deductible for the employer. For the employee, the contributions grow tax-deferred until retirement, similar to the Solo 401(k). Tax savings as a percentage are the same as for a Solo 401k. Possible savings are lower due to the lower contributions allowed.
D. You can’t borrow against your SEP IRA balance. Keep this in mind when choosing your plan. The ability to borrow against your retirement funds is a nice feature to have in your back pocket.
E. Sole Prop vs. Corp: Due to the disparate difference in tax rates, you would most likely save more as a Sole Proprietor (37% max vs 21% max).

III. Now Let’s Compare the Two: When should you use a Solo 401(k) vs a SEP IRA?

	Solo 401k	SEP IRA
Eligibility and contributions	Can only be used for Sole Proprietors with no employees other than a spouse. Solo 401k’s are expressly forbidden if you have employee’s other than a spouse.	SEP IRA’s are available to any business with or without employees.

Employee and Employer Contributions	Solo 401k’s are a combination of a 401k and a SEP IRA. The employer contribution component is still the SEP. There is no employer match of the 401k contribution.	SEP IRA’s have no povision for employee contributions. 100% of the SEP contribution will come from the employer. If you have employees, they must be allowed to participate if they qualify.

Tax Advantages	All contributions are deductible as an expense directly on your corporate return. Contributions are also deductions on your individual return, except it doesn’t reduce Self Employment income so it doesn’t affect your individual self employment tax. Contributions made by the employee is a reduction of taxable income on their return as well.	All contributions are deductible as an expense directly on your corporate return. Contributions are also deductions on your individual return, except it doesn’t reduce Self Employment income so it doesn’t affect your individual self employment tax. Since there are no employee contributions, SEP contributions do not affect the employees taxes.

Borrowing?	You can borrow against the balance in your 401k. Generally you have 5 years to pay the loan off unless you are buying your principal residence. If borrowing to by a home, you have upwards of 25 years to pay the loan back.	You cannot borrow against your SEP IRA account.

Sole Prop vs Corp	The method of calculating your contribution as a corp is dependent on wages paid on your W2. Calculating your contribution as a Sole Proprietor uses the Net Self Employment figure, but does not reduce self employment tax.	The method of calculating your contribution as a corp is dependent on wages paid on your W2. Calculating your contribution as a Sole Proprietor uses the Net Self Employment figure, but does not reduce self employment tax. Since there is no employee contribution the employee doesn’t get any tax relief.

IV. Now that you have all this great info in your head, which one is right? Solo 401(k) or SEP IRA

A. Employees?: If you don’t have employees and are married, the Solo 401(k) is probably the better choice. However, if you have employees or anticipate hiring in the future, the SEP IRA allows you to make contributions for yourself and your employees.

But. There is no reason you can’t start with the plan that best serves your needs at that moment and move to a different plan at a later time that suits your needs better at that time.
B. Contributions?: A Solo 401k has higher contribution limits, so if that’s your goal a Solo 401k plan is the one for you. I also believe there is no other plan better suited for a married couple working on their business.

A SEP is a lot easier to fund, but you have a lower contribution limit and if you have employees, they must be included and receive a share of any contribution.
C. Loans and Accessibility: Being able to borrow against the balance in your 401k can be a life saver. With no ability to access funds, other than through a distribution you will likely pay a penalty on, as well as tax, a SEP gets a big thumbs down here.

V. Conclusion: Solo 401(k) vs. SEP IRA Final Say!

With the level of complexity associated with most retirement plans it’s no wonder people panic and are anxious when having to make a decision as big as “What Plan Is Best?”.

They look at their current situation, and also envision how the company will look in1, 2, 5 or 10 years. With the invariable “Will this plan work for me in 10 years?” questions on the fringe of your thinking.

So what to do?

Husband or Husband/Wife teams would almost always benefit from utilizing a Solo 401k plan. With the ability to sock away $73,500 each in 2023 (and the max contribution amount goes up almost every year), a Solo 401k plan can be a great conduit to saving for retirement.

If you have employees, the best of the best is a SEP plan. You can contribute the most of any of the other plans (minus the above Solo 401k plan and a Defined Benefi plan, which we will discuss later). The big negative for most small businesses would be the requirement to fund your employees accounts as well as yours.

If circumstances change, like the wife has a baby and they decide the husband will stay home and raise the kids, you can change plans.

Watch for future comparisons between the most popular plans. I’ll be comparing between the following plans:

Traditional IRA
ROTH IRA
Defined Benefit Plans
Defines Contribution Plans
SIMPLE IRA Plans
ROTH 401k Plans

Until next time, thanks for reading and stay cool!

JKC

Using a Self-Directed IRA for The Ultimate Private Placement.

Or, how to use a Private Placement in Your Self Directed IRA to fund your business with retirement savings and pay no tax!

You’ve worked at a job for the past 15 years and want more from your career. Starting your own business is typically the next step. How would you fund this? By using a self-directed IRA and a Private Placement.

Saving for retirement is something we all think about on some level. I felt time was on my side when I was young. Now that I’m in my 60’s, I realize how misguided (politically correct phrase for stupid) I was in my thinking.

Another benefit of saving for retirement is

So what’s the deal with Self-Directed IRA Plans?

I. What’s a Self-Directed IRAs and Why Do I Care?:

The primary difference between a Traditional IRA and a Self-Directed IRA is the custodian of your account.

The “Big Guys” like JP Morgan, Schwab or Smith Barney can all house Traditional IRA’s for you but you are only allowed to buy the investments they offer. The IRS has a short list of the type of investment you can hold in your IRA.

The IRS must approve your financial institution to act as a custodian for self-directed IRA’s.

The list of investment options is much larger with a self directed IRA. It can also be a source of funding to invest in or start a business (this is considered for private placement since the investment is offered privately and not through a public offering)..

II. What Really is a Private Placement Investment:

Generally, private placement is a sale of securities to a preselected set of individuals (or institutions, but that doesn’t matter for the purpose of this article).

Private placements generally have much less government oversight or regulation to be concerned with.

I perform due diligence when I’m in a private placement not of my own doing (i.e. starting my own business or investing in one I have knowledge of). This is really important at this level since you can’t rely on the custodian of your IRA to do ANY due diligence for you.

Private placements have recently taken the place of IPO’s due to all the hoops the issuing company needs to hop through. These startups look at private placements as an IPO lite, or pre-IPO. A great way to get funding without dealing with all of the red herring laws associated with even a small IPO or offering to accredited investors.

III. What are the Nuts and Bolts of this Craziness!?:

Not every brokerage firm can offer you custodianship of a self-directed IRA or allow private placements. Investment firms which offer Self-Directed IRA tend to be more of a niche firm. They may offer other services, but they’d be more of the niche variety as well. Think precious metals or commodities.

A custodian of a Self-Directed IRA must be approved by the IRS and follow the same rules as other brokerage firms, plus additional regulations related to the types of trusts needed to hold your investments.

The custodian has a lot less liability exposure compared to custodians of traditional IRA’s. Self-Directed IRA custodians are only responsible for the administration and holding of the assets. They don’t have any responsibility as to the virtue of the investment. You will solely be responsible for any due diligence relating to the investments.

IV. This Is Where I Usually Tell You About Doing Your Due Diligence:

But not today. You don’t need due diligence if you’re trying to find financing to expand your own business, or buy a business. A Private Placement can be your business’ financing arm.

The simple explanation to using your IRA to finance your business is as follows:

Create a new corporation for the business. There will be special tax considerations if you’re moving assets from one corporation to another. This is done to maintain an arms length. Self dealing is prohibited.

Create a Self-Directed 401k plan for the business (I’d advise using a different custodian for the self-directed IRA). You will be an employee.

Initiate a rollover from your current IRA account(s) to your Self-Directed 401k account. Your self directed 401k account now has cash that you as the trustee can invest how you wish.

As trustee, you would have the ability to purchase stock in your new corporation. You would initiate a transfer from your self directed IRA account to the corporation checking account to purchase stock of the corporation. The corporation will then issue you stock shares which you will give turn over to your self directed 401k custodian.

V. If You Also Want To Invest in Private Placement Investments:

Since you are acting as trustee for your self directed IRA/401k, you have the option of making other private placement investments than your business. Other allowable investments are:

Real Estate (no mortgage)
Cryptocurrency
Private Investment (non listed)
REIT’s
Convertible Notes
Hedge Funds

Again, do your due diligence. Your custodian will have the paperwork and a checklist of items needed.

Holding private placements in a self directed IRA are like the wild west of investing. Treat this as such. I don’t think you’ll get scammed. But I do want you to understand that these are going to be much riskier investments with much less oversight than a publicly listed investment.

VI. Potential Tax Implications and Considerations:

Since you are administering your IRA, you are also responsible for observing and obeying all tax laws and FINRA/SEC regulations.

Since Private Placement investments are different beasts and run in different crowds, they are also less regulated. You need to be aware of things like Unrelated Business Tax Income, Unrelated Debt Financed Income, Required Minimum Distributions, and avoiding prohibited transactions.

Self-dealing is prohibited. You can’t rent “office space” that you own in a Self-Directed IRA to your business. You can’t enter into financial deals with disqualified people such as beneficiaries or the IRA, family members or yourself

VII. Conclusion:

Using a self directed IRA for private placement opens up a lot more available options regarding the types of investments you can hold in your IRA.

Since you will be self-directing your investments you need to be aware that the company acting as your custodian will not be giving you investment advice.

You must take care not to trigger a distribution by making a prohibited transaction or dealing with a prohibited person. If this happens, the IRS goes back to the year of the improper transaction and deems the entire balance of the account as a distribution.

A self-Directed IRA can be a source of funding for you to start or invest in a business. Since there are rules against self-dealing in the IRS code, a C Corporation is formed and a 401k plan started for the corporation.

A self-Directed IRA can also be used to hold real estate, precious metals, closely held corporations and other non standard investments.

How To Save BIG With These Auto Deductions for Self-Employed Individuals

We all drive. Almost everyone who is self employed will have to use their car for business. How do you write off your car? Let’s take a look at what you can and cannot deduct when it comes to your vehicles.

When it comes to auto deductions for self employed taxpayers, I haven’t met one self-employed individual who doesn’t try to write off 100% of their vehicle expenses, even if they use the vehicle personally as well. This isn’t really their fault though. I’ve seen ads and heard people talk about how their CPA lets them write off everything. I had a client ask about writing off an Audi R8. He didn’t qualify but the fact that someone is asking about writing off a $200,000 supercar on their taxes (and thought he could) tells you how much bad information there is out there.

The reality is it’s pretty easy to figure out what you can deduct and what’s off limits. Let’s take a look and see what’s best for you.

I. What Do You Mean I Can’t Write Everything Off?:

To determine the portion of your auto deductions for self employed that can be deducted, it’s essential to calculate the business use percentage. This percentage represents the portion of time you use your vehicle for business purposes versus personal use.

The personal use of your vehicle IS NOT deductible.

If we’re talking about a work truck or van (like a contractor would use) that has storage boxes or shelve installed (in the case of a van), you are more than likely writing off everything. This will be an issue if you don’t have another vehicle to drive during off hours.

II. What’s Legit Deductible?:

If you’re self-employed, then you can write off most auto deductions associated with your vehicle, including:

Depreciation
Lease payments or loan interest
Gas, oil and other fluids expenses
Insurance premiums
Repairs and maintenance costs
Licensing and registration
Tolls and parking fees
Upgrades to the vehicle (like the example above). Sometimes theres a way to write off expenses that seemingly don’t belong. The next example shows one way.

I had a shifter cart business get into the manufacturing of body kits and other go-fast parts for the Nissan GTR series, and started selling them on his website. He actually bought a GTR to “test” the parts for these cars. The bHe offered everything for sale on his website and actually made a profit on sales of bodykits and suspension components).

He took the car to shows and became known for his GTR support. He got to write off a $120,000 car because he actually used it 100% for his business. This just shows you that a little creativity may be required to get the best legit deduction.

III. Huh? Why Do You Care If I Have A Home Office?:

Isn’t this an article about Auto Deductions for Self Employed taxpayers? Why does a home office matter? Part of your mileage deduction relates to your actual miles driven. The IRS wants you to break it out between business usage, personal usage and commuting miles driven. If you take a home office deduction, you shouldn’t have commuting mileage.

Commuting mileage is specifically excluded in the IRS code. Here’s how I explain this to my clients.

The first trip of the day to your first destination is a commute, regardless of you taking a home office deduction or not.

The last trip of the day driving home after your last destination is also a commute.

So the first AND last trip of the day will not be deductible. Sounds easy, right? Wrong.

I had a client who lived about 2 hours away from his biggest client. He made this trip 5 days a week, first thing in the morning. His old tax person wouldn’t let him write off the mileage driven (about 240 miles a day) since it was his first AND last trip of the day.

The workaround I came up with was so simple, I was shocked his old tax preparer missed it.

I had him establish appointments near his home first thing in the morning. That trip became his commute.

I had him set up appointments on his way home too. So now his commute home wasn’t 120 miles, but closer to 20. This alone saved him close to $2,500 in tax the first full year he implemented this, and it’s perfectly legal.

IV. Record-Keeping and Documentation:

Tracking your auto deductions as a self-employed individual can be divided into two sections.

Mileage

The starting point is to track the miles driven. The easiest way is via an app on your phone. I use MileIQ but there are many others available. QuickBooks online has one built into their package and another one I’ve heard good things about is Everlance. The point is, you must track your miles to determine that percentage was driven for business.

Actual Costs

This is the second part of the calculation. It’s also the easiest part as long as you ALWAYS use your debit or credit card when you pay. Don’t pay for things with cash. It makes it a lot harder to capture in your books, and it makes it harder to prove to the IRS unless you have the receipt.

To calculate your auto deduction you calculate your mileage deduction first. Let’s say the IRS gives you $0.60 per mile driven.

If you drove 10,000 total miles with 7,500 being for business, you would have a mileage deduction of $4,500 (7,500 miles x $0.60=$4,500).

Now we’ll take a look at your actual expenses. In this example lets say your total qualified auto expenses (gas, repairs, maintenance, licensing, insurance, lease payments if a lease, interest expense if a purchase, depreciation if a purchase) was $9,000. Since your business use was 75% (7,500 of a total 10,000 miles driven), 75% of $9,000 would be $6,750. You would get a $6,750 deduction for your business auto use.

V. Anything Else You Need To Know?:

Personal use needs to be tracked. If you personally use your car, but don’t track anything the IRS will disallow 100% of your vehicle expenses.
There are rules for high dollar vehicle limitations (think Porsche or BMW). The max cost allowed is $58,000 and limits depreciation, bonus depreciation and section 179 deductions on “Luxury Vehicles”.
Your depreciation expense is directly affected if you buy a vehicle defined as a luxury vehicle per the IRS code. Your tax preparer should know these rules.

VII. Anything I Should Worry About In My State?:

Not really. This is one area the states have chosen to conform to IRS regulations. I haven’t found a state that doesn’t conform to the IRS mileage rate ($0.655/mile for 2023) One difference I do see is reimbursing your employee’s for mileage driven on their personal vehicles. This calculation changes based on the state. Since it’s too involved to go over here, my suggestion is to ask your tax preparer for guidance.

VIII. Who Can Help Me The Most?:

When it comes to writing off your self-employed auto deductions you really need to go to a licensed tax preparer. The IRS takes a look at around 8% of all filed returns. And the two categories they check the most are Meals and Entertainment, and Auto expenses.

Deducting your auto as a business expense is one of the most abused deductions available, and the IRS knows this. Stay out of their crosshairs by having a professional prepare your return.

While having a tax pro prepare your return is not a guarantee that they won’t call you out, the reality is most of that 8% referenced above is people who self prepare their return. Many years ago an IRS Revenue Officer told me that only about 2-5% of returns audited were prepared by CPA’s.

The IRS is a business unto itself. They will go after the low hanging fruit (self prepared returns) first, before going after someone who has competent representation (that would be the CPA).

Conclusion to Auto Deductions for the Self-Employed:

The key to maximizing your auto deductions is simple. You must track your mileage. I us MileIQ to track my driving and the beauty is, it only cost $60/year. Go to their website every week or month and designate which trips are business related and which are personal.

The reason for this is it will allow you to allocate your auto expenses on a pro rata basis.

As an example, Mary drove 10,000 total miles in 2022 split evenly between months. She tracked all her driving in Mile IQ and this revealed she drove 5,500 miles for business and 4,500 miles personally.

Mary also tallied all of her vehicle expenses (not including loan payments, but including the interest paid on the loan). This total came to $12,000.

Her mileage deduction calculation would look like this:

5,500 miles @ $0.585 = $3,217.50

4,500 miles @ $0.625 = $2,812.50

Total mileage deduction would be $6,030.00

Based on miles driven, total business cost is $6,600 (5500/5500+4500= 55% times $12,000)

Since the actual costs pro rated is more than the mileage deduction, you would take the actual costs as a deduction on your taxes.

And that’s how to calculate your auto deductions for self employed taxpayers.

How To Deduct Travel Expenses as a Real Estate Investor and save $1,000’s!

I’ve had a lot of clients who were real estate investors and they all want to write off their travel expenses to visit a property or check a prospective property they may purchase.

Can you deduct travel expenses? For the most part (remember later that I said “most part”) you can deduct your costs of traveling, lodging, meals and incidentals. Let’s take a look at a thoroughly confusing topic and shine a little light into the fog.

I. Two types of investors:

Before I tell you how to deduct your real estate travel expenses, we need to categorize your business activity. You’re either a Real Estate Professional (REP) or you’re not. At least for tax purposes. Being an REP is definitely preferential for tax purposes, but qualifying is not easy. Here’s what you need to do:

First, you need to spend more than 50% of your total time working in a real property trade or business.

That total must be more than 750 total hours. No part timers allowed.

Lastly, you must “materially participate” in each rental activity.

To have “materially participated” is a facts and circumstances kind of thing. Hiring a management company to manage your rental properties would absolutely disqualify you. Being the guy up on the ladder at 10pm painting the interior 2 days before the new tenant moves in would lead me to believe that you are materially participating.

Not many will qualify. The material participation rule is pretty easy. It’s the first qualification that gets most people. I’ve had clients with a dozen rentals who did all the work and more than likely spent 750 hours during the year, but they had a full time non-realty gig (2000 hours) so they failed the first test.

Here’s a couple of examples:

Melanie:

Melanie worked at a stained glass shop full time. Over the course of the year she worked 1,900 hours making stained glass windows. She also owned three rental properties and did all the work on them. She will not qualify unless she can prove that she worked at least 1,900 hours in real estate, materially participating in all aspects of managing her properties.

Steve:

Steve worked part time preparing taxes for H&R Block during the busy season. He works 980 hours. Like Melanie, he also owned three rental properties and did all the work on them. He worked 1,200 hours managing and maintaining his rental properties. Steve would qualify as a Real Estate Professional.

II. Which one do you want?:

I just made a big deal of the requirements to qualify as a Real Estate Professional, so that one is obviously the most preferential. As an REP you aren’t limited in how much loss you can take from your rental activities. As a non REP (regular taxpayer with rental property who doesn’t satisfy the tests above) you will be subject to Passive Activity Loss rules and limited to a maximum of $25,000 in losses annually. Your ability to deduct for real estate travel is tied directly to this classification.

Passive Activity Loss rules don’t make tons of sense in this example because a passive activity by definition means you aren’t materially participating. But most owners of rental property are in charge of getting renters, repairing things and are 100% responsible fore everything.

The biggest negative in my mind regarding the Passive rules is the loss amount available. There’s a maximum $25,000 available, but your income affects the ultimate deduction. The $25,000 available is reduced dollar for dollar once our income hits $125,000, with no deduction available once your income exceeds $150,000.

Maybe the most important benefit is not having to pony up for that lousy 3.8% Net Investment Income tax on investment income over $250k for a Married Filing Joint taxpayer. With real estate in many states selling for over $1,000,000, being classified as a Real Estate Professional has real benefits.

An example:

Nick and Dianne are not Real Estate Professionals. They sold a rental home and netted a $1,000,000 capital gain. They would pay an additional $28,500 in Net Investment Income tax due to the sale.

In this example, Nick is a Real Estate Professional. Nick is an REP and isn’t required to pay this tax.

What about the other guys?

Well, you get the previously mentioned $25,000 passive activity loss you can use.

As mentioned above, you still have a rather large potential deduction at your disposal. In regards to travel, the potential big deduction you will lose is the ability to write off travel to visit prospective purchases. Add the travel costs to basis once you purchase the property. If you don’t buy there is no deduction.

III. Eligibility Criteria for Deducting Travel Expenses:

What’s the relationship of the expense to your real estate activity? If there is a direct relationship, i.e. traveled to make repairs or meet with contractor to go over improvements? Fully deductible.

Where it gets sketchy is when you commingle work with vacation. Take a week and visit your rental in Lake Tahoe? Ski 5 of 7 days and work on the property the other 2? You must allocate the expense between business and personal enjoyment.

IV. Travel Expenses for Property Acquisition and Management:

If you are a Real Estate Professional, you get a travel and meals deduction for travel to visit prospective properties. Even if you don’t buy. Since you are in the “business” of real estate, checking on available properties out of your tax area is likely. It would be the same if you were in manufacturing and had to visit a prospective vendor of a raw material used in making your product. Its necessary to the success of your business.

If not an REP, then no deduction. In the eyes of the IRS, if you can’t qualify as a Real Estate Professional, you aren’t in the real estate “business”. It’s a passive activity, almost like its nothing more than an investment in Microsoft stock. Even though you’re doing all the work, they still categorize it as a Passive Activity and you have to abide by the passive rules.

V. Travel Expenses for Rental Property Visits:

Buy that condo on Maui or in the Bahamas. Deduct your travel expenses to inspect or work on your rental property will be deductible. But be careful with this. You actually have to work on the property to get any kind of deduction. Take a 2 week trip and work 1 week on your property? You can take 50% as a tax deduction.

VI. Track your information better:

If you’re a Real Estate Professional, you need to maintain a set of books. It’s your business. I’m a fan of QuickBooks Online since it’s relatively easy to learn and being online allows you (or anyone else who works on your books) to access from anywhere there’s WiFi.

Not maintaining good records can ultimately cost you.

I had a client many years ago who was ok, but not great at her recordkeeping. She would pay for a lot of expenses with cash and not put it in her books. Every year she would tell be she spent “a couple hundred” with cash for me to add to her return.

One year I bet her the cost of her return that if she just saved all her cash receipts for the year, it would be over $1,000 instead of the “couple hundred” she always told me.

The next year she brought her stuff in with an extra envelope full of cash receipts. She averaged over $500/mo. $6,000 in additional deduction that saved her around $2,400 in tax.

Do your books people.

VII. Make sure your tax person knows these rules:

Get someone who knows who can deduct travel expenses. Since real estate is one of the biggest industries in the US, the tax code is filled with rules specific to the industry. With a cost of entry low enough that almost 7% of taxpayers own residential rental property, it makes sense that this is a spot Congress can look at when forging policy (not to mention the fact that Real Estate is on of the four largest industries in the USA).

With the majority of people who own rental property not classified as a Real Estate Professional, you will need someone who knows the rules, and more importantly, knows how you specifically are classified as a taxpayer and how best to utilize those rules to your benefit.

Conclusion:

You want to deduct travel expenses? As a Real Estate Professional, the IRS sees you as primarily in the real estate industry.

As a Real Estate Professional, you will be able to deduct travel to and from anything related to your real estate world. This includes travel to see perspective properties to purchase. This deduction is not available for passive properties.

A real Estate Professionals primary focus is making money through buying, selling, renting and renovating real estate. Travel may be an integral part of business. Travel is a direct cost so it’s a deductible expense.

If you don’t qualify as a Real Estate Professional you will be limited to a max $25,000 loss in a tax year. Your rental activity is considered a passive activity for tax purposes.

Someone who has a passive activity however is limited to deducting travel for visits to already existing properties. If you have a property on Maui, you could conceivably visit every year to inspect and make any repairs or upgrades, and your trip would mostly be deductible. If you take a one week trip to visit your property and spend 4 days working on the property and 3 enjoying the island, you can deduct 4/7 of your travel.

On the other hand, if you are visit Maui with an intention of buying a property, but ultimately don’t? No deduction. Not even with t

5 Money Saving Tax Deductions for Successful Real Estate Agents

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!