Tax Tips for Real Estate Agents filing for 2023
As a real estate agent, you work as a self-employed individual. Instead of a W-2, you receive a 1099 from a brokerage that doesn’t figure in any federal or state income taxes. Though estimating your taxes and preparing for tax time is a time-consuming part of your role, it’s necessary to avoid large tax bills when you file.
Understanding how the Internal Revenue Service (IRS) works is essential to maximizing your income and minimizing tax liability. These tips and strategies will help you navigate taxes as a real estate agent so that you can write off as many business expenses as possible and pay enough taxes in advance to avoid hefty bills.
- Note: You will get the best results when you work with a tax professional who can coach you through what % of your earnings to save, what receipts and records to keep, and much more.
Disclaimer: This blog is for informational purposes only but not a complete guide. Please consult a tax professional for the most accurate and up-to-date information regarding tax credits.
Know how deductions and credits work.
Self-employed real estate agents should take advantage of every known tax deduction and credit available to them. But first, you must know how deductions and credits work.
A tax deduction is the number you can subtract from your total taxable income. The higher your deduction, the less income the government can tax. You can either use standard or itemized deductions.
Itemizing requires more calculations, but it can add up in your favor if your financial activity involves a lot of deductible expenses like charitable donations. For 2023, the standard deductions are:
- Single or Married Filing Separately: $13,850
- Married Filing Jointly or Qualifying Widow(er): $27,700
- Head of Household (single parent): $20,800
If the itemized deduction totals more than your standard deduction, you should use it to reduce your taxable income, which results in getting taxed less.
Tax credits are dollar-for-dollar reductions on the total tax owed.* If you owe zero, then credits become money that goes right back to you. If you owe state or federal taxes, credits can reduce this amount, so you owe less. The more credits, the better for your bottom line.
*In most cases. Some credits won’t be refunded past your tax calculated.
What deductions and credits can real estate agents claim?
As independent contractors, realtors can claim everyday expenses related to running a real estate business, such as:
- The portion of commissions paid to other agents or employees.
- Cost of office supplies.
- Business meals.
- Miles traveled for business purposes (this adds up quickly)!
- Self-employment tax reimburses the 7.65% tax you pay that employers typically pay for employees.
- Marketing materials like business cards, website costs, marketing campaign creation and management costs, brochures, lead management software, and much more.
- Professional service fees, such as what you pay your CPA to manage your taxes.
- Cost of client gifts as long as they don’t exceed $25 per person per year.
- Tuition for classes taken to further real estate education.
- Business insurance premiums.
- Membership and licensing fees.
- Wages paid to employees.
It is essential to check with a CPA to ensure you claim the correct expenses. By taking full advantage of the deductions and credits available, self-employed real estate agents can save significant amounts on their tax bills.
A Closer Look at Home Office Deductions
If you have a place in your home exclusively used for work, then you can claim some lucrative tax breaks here. You don’t have to own the house either — renters can claim some business expenses through a home office.
You may be eligible to deduct office expenses like utilities, insurance, cost of supplies, improvements, mortgage interest, and other tax breaks on your Schedule C of your tax return.
To calculate these deductions, you will need to report the square footage of your home office. Depending on its size, you can claim a fraction of your house’s utilities and mortgage interest as “indirect” expenses. Since that part of your home is used for business purposes, you can legally claim everything you pay for the business use of your home.
But what if you work from your broker’s office too?
If you also work from your broker’s office, you may still qualify for home office deductions if your home office is your principal place of business. You’ll need to meet two requirements from the IRS to qualify. We took these terms directly from the IRS website:
- “You use [the home office] exclusively and regularly for administrative or management activities of your trade or business.”
- “You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.”
A principal place of business is where you do all your bookkeeping and keep records. For example, if you pay all business-related bills from your home office, it can be considered a primary office. If these tasks don’t happen at your broker’s office, you can potentially claim your home office as principal.
To ensure you can do this, talk to your CPA and make clear boundaries at your brokerage office. For example, don’t keep record-keeping apps on your brokerage computer. Ask your tax pro about other ways to make a clear distinction between the main home office and brokerage office to keep your records legal.
Keep Accurate Records
Keeping accurate tax records takes time, but submitting an accurate and complete tax return is essential. Keep receipts from every business-related purchase. Whether you store receipts in a filing cabinet or create a digital paper trail, your system must make it easy to find the necessary documentation. Taking the time to keep tax records will ensure that everything is up-to-date and ready for your CPA, especially if you drive a lot of business miles and spend frequently on office improvements or invest in CRM software.
Consult a Tax Pro
Professional tax services are invaluable to real estate professionals. Every sole proprietor should consult a tax pro to understand their rights fully, what is legal to deduct, and how they can keep accurate records. They can also organize quarterly estimated tax payment sessions where a CPA can advise them on how much to send to the IRS to avoid penalties and unexpected payments in April.
Tax Tips for Real Estate Agents
Tax season doesn’t have to be a scary experience. Real estate agents can access many benefits related to running a small business when filing taxes. Whether they consult a CPA or use tax software, agents can optimize their business operations with proper tax write-offs.
Alicia Persson is a Content Strategist SEO writer at Marketplace Homes, utilizing previous years of experience on real estate teams that specialized in investments and property management. Before she joined Marketplace Homes, she was also a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.