Because real estate agents do business as a sole proprietorship, the tax situation can become somewhat complicated. You are not employees in the 40-hour per week sense of the word, you are not in a partnership, nor are you incorporated.
Real estate agents receive direct recompense in return for selling a home. Everything else is controlled by a written contract. In other words, as long as you define your work like this, you are not treated as an employee by the IRS. You are treated like a business with the same types of deductions a business is allowed.
These are some of the most common allowed deductions realtors take on their taxes:
- Advertising
- Office expenses
- Automobile
- Supplies
- Education related to the job
- Professional licensing and membership fees
- Insurance
- Meals and entertainment
- Depreciation
- Business travel
That looks like a lot of deductions, doesn’t it? The trick is in keeping the receipts organized and ensuring a receipt is provided for each deduction. Those receipts will be required if an audit ensues.
Still, if you don’t mind recordkeeping, this is your big chance to decrease your tax burden.
For example, automobile expenses, which are the number one deduction made by realtors and other sole proprietors, can be broken into a variety of categories, each of which is deduction-worthy. If you drive for working purposes, this is deductible. You can deduct costs associated with maintenance, repairs, even car washes. But watch out; traveling from home to office and back does not count.
Don’t like to keep that many records? That’s OK, you can still use a standard mileage rate; this year that is 56.5 cents a mile. Now you only need to keep track of miles driven in pursuit of your employment. If it’s the family car it means subtracting any miles driven for other purposes, like taking the kids to soccer practice.
Something that is a bit trickier these days is that old standby: the deduction for meals and entertainment of clients. First of all, you can’t just take your buddies to the game and out for drinks planning to write the whole thing off. Now you are required to have a substantial and “serious” conversation about business before, during, and after the event. Make sure to do that and you will get to deduct 50% of the cost. Of course, get all the receipts and prepare everyone to testify that you had those serious conversations at the right times.
If you are uncertain about any deduction, ask a tax preparer or accountant familiar with business taxes to help you out. Getting your tax return right the first time saves money and anxiety in the long run.
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