Tax Deductions Every Real Estate Professional Should Know About

Real Estate Professionals are among the busiest professionals out there and it can be hard to find the time and energy to get all your expenses for tax time.

But the tax deadline is around the corner and there is no time like the present to get a system to start tracking.

TRU (Tax Reduction University) recommends setting time monthly to organize your income and expenses for your business.

 In the spirit of Michael Gerber’s “The E-Myth Real Estate Agent: Why Most Real Estate Businesses Don’t Work And What To Do About It” taking time OUT of your business to work ON your business is an incredibly productive use of your time.

 We highly recommend both that book and “The E-Myth Revisited” as required reading for any real estate professional.

What Is Deductible?

 Before you dive into our short list, keep in mind that for a business expense to be deductible it must be:

• Directly related to your business, AND
• Ordinary and necessary 

 This means (in plain English) that the expenses have to be related to your business and not extravagant compared to your business level. 

 The common example I use is, if you’re generating $250,000 in gross income then an annual or even quarterly networking mixer event at a local restaurant or event center that costs $3,000 to $5,000 to host would be both directly related to your business and be considered both “ordinary and necessary” expenditure to help marketing your business.

However, a networking event held annually or quarterly on a private yacht in the San Francisco Bay that costs $30,000 to $50,000 to host would not be.

 While it could be argued that it’s directly related to your business as a networking event it would not be an “ordinary and necessary” event to hold.

 As this is written, I can already hear some of you working to argue that point in my mind. Take my word for it, the “ordinary and necessary” is more important than you realize and the old farm saying “pigs get fat, hogs get slaughtered” would be wise to keep in mind when it comes to tax reduction strategies. 

With all that in mind, here’s a list of common deductions for Real Estate Professionals to help you as you work to get your business expenses together:

 Deduction #1- Bank Fees

The best thing you can do for your sanity and your business is to establish a separate bank account for your business.

 Keeping your business income and expenses segregated and avoiding “co-mingling” of business with personal accounts makes life that much easier when it comes to gathering your information on a weekly, monthly, and annual basis.

 There may be some bank fees associated with the establishment of a separate account, but these expenses are tax deductible and definitely worth the expenditure in the long run as you get your “house” in order!

 Deduction #2- Home Office

 Speaking of your house, it is a very real fact that most of the Real Estate Professionals work from home even if they have an office with their brokerage. 

 This means that you can take advantage of the home office deduction. 

The home office deduction offers two options: the regular method or a simplified method. 

 Most self-employed people find that the simplified method maximizes their deduction.

However, before pursuing this option, know that your home office has to be used regularly and exclusively as the principal place of business. This means your bed, porch swing, and kitchen table do not count as deductible expenses.

If you are operating your business as a Corporation, you can submit an invoice monthly to your Corporation for reimbursement of this expense and report that expense on your Corporate tax return.

To be able to claim both your home office and your desk fees you must be able to show that you work from home and perform administrative tasks more than 20% of the time (or that your desk at your broker's office is for convenience only and that you spend most of your time working from home).

Deduction #3- Desk Fees

This is straightforward. If your broker is charging you fees, then those fees are deductible.

 Deduction #4- Education & Training

Training and education are deductible if they meet these requirements:

 -    The training and education cannot qualify you for a different trade or business.

-    The training cannot be for the purpose of meeting minimum educational requirements to enter the field

-    The training course(s) must maintain or improve the skill related to your field of real estate.

 Deduction #5- Marketing & Advertising

Marketing materials, staging, photography, and signage expenses can quickly add up for Real Estate Professionals.

 In addition to these, costs of a website and any TOMA (Top Of Mind Awareness) campaigns that you may be running can also increase this area of expense.

 It is incredibly important to take time OUT of your business to work ON your business and keep a detailed record of your expenses monthly.

 Over the years we’ve seen many Real Estate Professionals spend much more in this category than they realized because they were not keeping tabs on their expenses and were only keeping a “running total” in their head.

 When sitting down to pull their expenses together, they were shocked by how much they had been spending.

 Make the time to pull your information together on a regular basis and be judicious in your spending. 

 The adage of “you have to spend money to make money” can be true but being wise in your expenditures is key.

Deduction #6- Auto Expenses

 Real Estate Professionals could almost start a blog about the things they see as they travel! You folks spend a lot of time behind the wheel in your neighborhoods and regions. And those miles add up FAST!

 The ideal method for vehicle optimization for Realtors is likely the milage deduction. This rate changes annually but automatically tracking your miles through an app on your phone is the best way to keep track of your miles.

 If for some reason the “actual expense” method of oil, gas, tires, repairs, etc. is a better write off the little-known fact is that the number of miles you drove for business is still needed by the IRS to justify those deductions.

 So, make it a habit and track your miles! And automate it and put that technology to use and use an app to make your life easier.

Deduction #7- Office Supplies & Equipment

Paper, pens, computer, printer, post it notes, whiteboards (I have 7 whiteboards hanging in my office!), and things such as this are all deductible expenses for your business.

 Again, tracking these expenses on a regular and consistent basis can help you both keep tabs on the expenses to capture the deduction and realize how much you are spending on these things. 

 This is an area where you can quickly overspend without realizing it and tracking these expenses is one way to not overindulge on those new whiteboards that you really want but may not necessarily need. 

Deduction #8- Meals

Meals are deductible if you are traveling for business and/or dining with clients or other professionals for business purposes.

 For 2021 & 2022 tax years, meals provided by a restaurant are 100% deductible due to Covid-19 tax relief bills.

Deduction #9- Fees & Licenses

Real Estate Professionals incur professional fees for memberships, licenses, MLS dues, etc.

 This means that your professional fees are deductible.

Deduction #10- Insurance 

Cost of insurance (other than health and auto- those expenses are treated differently… keep reading to find out more) are deductible as business expenses.

 E&O and general liability generally fall into this category.

 Insurance on devices (phone, tablet, etc) can also be deductible if you’re incurring those costs to protect against loss of use.

Deduction #11- Software & Business Tools

Software and tools you need to run your business are deductible.

That milage tracker app we mentioned earlier- deductible!

 Your lead generation subscription for marketing purposes- deductible!

Your QuickBooks subscription for tracking business income and expenses- deductible!

If it’s directly related to your business and a “reasonable and ordinary” expense, then it’s generally considered deductible.

Deduction #12- Gifts

 Technically, gifts are deductible only if they are limited to $25 per person per year.

 This can be a fine line but rather than giving gifts, creating a marketing campaign where the “gifts” are packaged in a way to generate leads (pies at the holidays with a handwritten card, a calendar branded with your information, a “welcome to your new home” gift basket” branded with your information, etc.) all designed to generate top of mind awareness are key elements of marketing and advertising and therefore are arguably not gifts in the true sense but are really marketing tools to keep you top of mind with your friends and contacts.

Deduction #13- Health Insurance

Health insurance premiums paid for you and your family may be deductible, if you and your spouse are not eligible for an employer-sponsored health plan. This includes medical insurance, dental, and long-term coverage. 

If you are operating your business as a Corporation, your health insurance may be required to be included in your compensation.

Deduction #14- Telephone

Realtors spend a lot of time on the phone conducting their business! That is a universal truth.

Your phone service is a deductible expense. 

Read that again: Your phone service. 

Not the entire family plan and everyone on the plan. If your spouse, child, sibling, friend, etc. are on your phone plan then those lines are not deductible for your business unless they are directly involved in your business and there is a legitimate business purpose for having them on your plan. 

Deduction #15- Commissions Paid

 This is a SUPER critical area to understand for Real Estate Professionals.

We highly recommend the following practice after every closed transaction:

Celebrate with your client and give yourself a reward for your hard work!

Reconcile the commission payment you receive so that you understand and have a record of:

1.  The gross commission (based on your split rate with your broker)
2. The deductions for brokers fee
3. The deductions for any technology and desk fees
4. The deductions for insurance costs, etc.
5. The net amount that hits your bank account

If you do this each transaction, you should be able to reconcile at year end to your 1099 that is issued to you and properly identify if the broker has already reduced the 1099 by the amount of those deductions or if you need to include these deductions on your tax filing.

Avoiding the “double dip” is critical to not deduct expenses twice in error. 

Plus, understanding the true costs of working with your broker is critical and knowing what they’re providing for their cut of the pie so to speak.

In addition to your broker, any other professional services that you pay for as part of your business model (team expenses, photographer expenses, etc.) are deductible as either commissions or professional services.

Tracking these expenses during the year and making sure that you have an accurate tally of those expenses makes it easier to reconcile to a 1099 or generate a 1099 at year end for tax reporting purposes.

SYSTEMS OF BUSINESS

 The real magic of tax savings comes down to the systems approach.

 The Government has a ruthlessly efficient system through which they take from you a very large portion of your hard-earned profit!

 Fighting back with a system of tax savings.

 Tax Reduction University (TRU) is that system that finally gives small business owners (YOU!) the

 EDUCATION you need to save money on taxes,

EVALUATION tools you need to see how that education applies to you, and 

EXECUTION steps you need to take to capture those tax savings and keep the money out of the government coffers.