How Everyone Can Maximize Savings and Deductions
Tax season can be overwhelming for agents and clients, but you can reduce tax liabilities, maximize deductions and ensure tax compliance by being tax-aware about tax strategy. Whether you deal with your own business expenses as an agent or assist your clients through the tax consequences of purchasing and selling property, tax awareness can equate to serious dollars.
This guide will reveal some fundamental real estate tax tips for agents and clients to help everyone deal with tax concerns more effectively.
Tax Deductions for Real Estate Agents
Most real estate agents work independently and need to track their expenses and income very carefully for maximum tax deductions. That’s why it’s important to be aware of the following useful tax tips for agents. Remember, always consult the IRS or a tax professional, as tax laws are subject to change.
1. Business Deductible Expenses
Many everyday expenses for real estate agents can qualify for tax deductions, including:
- Marketing and Advertising: Website upkeep, flyers, business cards, open house signs, and online advertisements through social media.
- Office Costs: Office expenses (if deductible), office rent, utility bills, and office supplies.
- Vehicle and Transportation Costs: Transportation costs for work travel, including gas, tolls and parking.
- Continuing Education and License Fees: Education classes, certifications and yearly renewals for licenses.
- Professional Fees and Memberships: Realtor association membership dues, MLS membership and attorney consultations.
2. Home Office Deduction
Suppose you work from your residence and you have a space you use for work. In that case, you can claim a home office deduction, where you can claim some fraction of your rent or mortgage, utility costs and internet costs proportionate to the business use of your residence.
3. Pension Contributions
Self-employed agents can minimize their tax payments by contributing towards retirement plans such as:
- SEP IRA (Simplified Employee Pension)
- Solo 401(k)
- Traditional or Roth IRA
These accounts provide tax advantages and also help you save for your retirement.
4. Keeping Accurate Records
Proper documentation is essential for deductions. Accounting computer packages like QuickBooks, FreshBooks or Wave can also help you track income and expenses. Having good records and holding onto your receipts helps you avoid audit risk and allows you to claim all the real estate agent tax deductions available.
5. Quarterly Estimated Taxes
Since commission-based pay is not subject to automatic tax withholdings, you will need to make quarterly tax payments to the IRS. If you don’t make the payments, you will pay penalties. To avoid this, set aside some portion of your commission pay for quarterly tax payments.
irs.gov
IMPORTANT!
Always consult a qualified tax professional to ensure you’re taking advantage of all available deductions and strategies.
irs.gov
Tax Planning for Real Estate Clients
Whether it’s your investors, buyers, or sellers, your clients need to hear about the tax implications. These are some current real estate tax tips you can share with your clients. As always, it’s advisable to consult the IRS or a tax professional, as tax laws are subject to change.
1. Taxability of Mortgage Interest
Homeowners can claim the interest payments made toward their mortgage, which can substantially lower their taxable income. This is very helpful during the earlier phases of the mortgage when the interest payments will be greater.
2. Property Tax Deduction
Right now, state and local property taxes are also deductible, up to a combined $10,000 maximum under the SALT (State and Local Taxes) tax deduction limit. For the most up-to-date information, it’s advisable to consult the IRS or a tax professional.
irs.gov
3. Capital Gains Tax on Home Sales
Clients selling their primary residence can qualify for the Capital Gains Exclusion, where they can exclude up to:
- $250,000 gain for those filing separately
- $500,000 for married couples filing jointly
To qualify for this exclusion, homeowners must meet the following criteria:
- Ownership and Use Test: The property must have been both owned and used as the taxpayer’s primary residence for at least two of the five years preceding the sale.
- Frequency Limitation: The exclusion can only be claimed once every two years.
Additionally, if the entire gain is excluded under this provision, taxpayers generally do not need to report the sale on their tax return unless they receive a Form 1099-S.
irs.gov
It’s important to note that these rules apply to sales of primary residences and not to investment or rental properties. For detailed information and potential exceptions, refer to IRS Publication 523, “Selling Your Home.”
irs.gov
4. Real Estate Investment Tax Deductions
Clients who own rental property can make use of various real estate tax deductions, including:
- Depreciation: Depreciation is recoverable for the property over the years.
- Repairs and Maintenance: Repair, painting and upkeep costs can be deductible.
- Loan Interest: Loan interest for the purchase of rental property is deductible.
IMPORTANT!
Encourage your clients to consult a qualified tax professional to ensure they’re leveraging all available deductions and strategies. By proactively planning for taxes, you’ll not only help them save money but you’ll also strengthen your relationship as a trusted real estate advisor.
irs.gov
