As we enter the fourth quarter, now’s the time to get your finances in order for Tax Day. Here’s a quick look at what is and isn’t deductible as you prepare for tax season in real estate.
The last thing you want are financial surprises after a tough year in real estate, especially when it comes to taxes. Tax Day comes around every year, and most agents can’t afford to not plan ahead for it.
In “How bad is it? 14 scenarios for what agents can and cannot let fall by the wayside,” Inman’s Lillian Dickerson, talked to experts to find out what can and cannot be left by the wayside, whether agents are busy, burned out, or just need a break. (Spoiler: Not stashing cash for your taxes is a really bad idea.)
North Carolina-based tax professional Dalaine Bradley recommends saving at least 20 percent of your monthly income into an account specifically dedicated to taxes. Some agents may even opt to pay their taxes quarterly to avoid paying an eye-popping amount come Tax Day, which can also feel more manageable psychologically.
There are many apps that can help you keep track along the way, as Million Dollar Listing LA stars James Harris and David Parnes outline here.
However, you have to start by knowing what is and isn’t deductible. Below, we’ve created a quick list to help you suss out what’s critical. Bookmark it, or take a screenshot if need be to stay on track.
The expense: Paid out commissions
Keep careful track of all those commissions paid out throughout the year because they can help out a lot come tax season.
The expense: Vehicle costs
Claiming the standard deduction usually helps individuals who drive at least 10,000 miles for business, which still requires keeping a detailed trip log.
The expense: Home office
For individuals with a bigger office or a more expensive home, the regular deduction may be more fruitful. The simplified method allows agents to deduct $5 per square foot up to $1,500.
The expense: Desk fees
Desk fees are deductible, no matter the size of the brokerage or whether it’s a franchise, independent or otherwise. But, they are not deductible if an agent is already claiming home office expenses.
The expense: Marketing and advertising costs
Any promotional items like business cards, flyers, signage and photography can be claimed, as well as the production costs associated with them.
The expense: Training and education
Expenses associated with education, training courses, coaching and conferences that are specific to the real estate industry are all deductible.
The expense: Licenses, memberships, fees, insurance
Qualifying deductibles include state license renewals, professional memberships, MLS dues, general business and errors and omissions (E&O) insurance and real estate taxes necessary to conduct your business.
The expense: Software
Software that’s necessary to keep an agent’s business running — accounting software, lead generation software, CRMs and any other products that can help track expenses or mileage — is also deductible.
The expense: Parking tickets and court fees
Any parking ticket or court fees incurred while on the job or as a result of work activity are not deductible — the IRS won’t go for that.
The expense: Gifts
For the most part, client gifts are deductible. However, there are a few caveats that agents need to be aware of per IRS guidelines.
The expense: Business meals
Any meals consumed while on a business trip or meals eaten with clients or colleagues in order to discuss business or generate referral business qualify as a deduction.
The expense: Office supplies and equipment
Office supplies and equipment, like stationery, photocopies, furniture to computers, phone and internet bills and more, are deductible.
The expense: Health insurance
If an agent and their spouse are not eligible for an employer-backed health plan, their health insurance premiums paid for themselves and their family will be deductible, including medical insurance, dental insurance and long-term insurance.
The expense: Donations
Agents should never hesitate to donate to causes important to their community and save those receipts for tax season.