For busy real estate agents who manage their own finances, it can be hard to find time (and energy) to get expenses in order. Alas, it is never too early to schedule your tax filing time block – Monday, April 18, 2022, is the deadline for filing for the 2021 tax year. The Internal Revenue Service advises, “While taxpayers should not file late, they also should not file prematurely. People who file before they receive all the proper tax-reporting documents risk making a mistake that may lead to processing delays.”
To help kick-start your preparations, we’ve outlined several tax deductions that you should not overlook. From commissions paid to home office expenses, there are several activities that could reduce the amount owed to the IRS.
Deduction #1: Commissions Paid
Did you know that commissions you pay to other agents or employees that work with or under you are generally fully deductible business expenses? This is a deduction you should not overlook since commissions can add up quickly!
Deduction #2: Home Office
If you conduct business out of your home (or parts of it), you can take advantage of the home office deduction – unless you are deducting desk fees already (see deduction number three). Like the vehicle 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.
Deduction #3: Desk Fees
Whether you are hanging your license under a national franchise or with an independent broker, your desk fees are deductible. (Remember though, if you’re taking the deduction for brokerage desk fees, you will not be able to claim the home office deduction mentioned above.)
Deduction #4: Education and Training
Given rapid industry change, continuing education is a great way to stay competitive. Taking training courses like BOLD to further your professional education and maximize your potential? You may be able to deduct your registration fees, related materials, and certain travel costs. There are several 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.
- The training course(s) must maintain or improve the skill related to your field of real estate.
Deduction #5: Marketing and Advertising Expenses
Digital and online advertising costs are quickly becoming the greatest area of spending. Advertising expenses such as marketing materials, staging, photography, and signage can all be deductible through the Internal Revenue Service’s advertising expense deduction. This is one of the best deductions because of its broad requirements!
Deduction #6: Standard Auto
Between showings, listing presentations, and more, miles can rack up fast. With the standard auto deduction, every mile you drive for your business can be deducted from your taxes. If you drive 10,000 miles or more annually for your real estate business, it’s likely you’ll get the greatest tax benefit by taking the standard mileage deduction. For the 2021 tax year, the standard mileage rate is $0.56 per mile. However, if you’re a lower mileage driver or have especially high car payments, the actual cost method may yield a higher deduction.
Deduction #7: Office Supplies and Equipment
Whether you’re taking desk fees or home-office deductions, you can still claim other office-related expenses including stationery, photocopies, and any other consumables needed to run your business. Furniture, fax machines, copiers, computers, or your telephone (and associated bill) can also be expensed in full or depreciated over a number of years.
If you have a dedicated landline telephone for business, you can fully deduct this expense. If you use your cell phone only, you are eligible to deduct the business percentage of that expense.
Deduction #8: Meals
There are two situations in which you can deduct meals as a business expense: when you are traveling on business, and when you are dining with clients or with other professionals for the purpose of conducting business or generating referral business. For the 2021 (and 2022) tax years, meals provided by a restaurant are 100% deductible, due to a COVID-19 relief policy designed to help restaurants.
Deduction #9: Fees, Licenses, Memberships, and Insurance
Annual fees are a common cost of doing business and are deductible. In real estate, that means your state license renewal, professional memberships, and MLS dues. An important caveat with regard to professional memberships: the portion of your membership dues attributable to lobbying and political advocacy is not deductible.
General business insurance and errors and omissions (E&O) insurance are both fully deductible business expenses. Additionally, you can deduct real estate taxes necessary for your business, and self-employed individuals receive an income tax deduction for half of self-employment taxes.
Deduction #10: Software and Business Tools
Any software needed to run your business is fully deductible – including lead-generation subscription services such as customer relationship management (CRM) software. Products that help you automatically track your expenses and mileage may be fully deducted as well.
Deduction #11: Gifts
All of the amazing client gifts that you gave out over the course of the year are deductible as long as you follow the IRS’s stipulations:
- You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during the tax year.
- If you and your spouse both give gifts to the same person, you are treated as one tax payer.
- Incidental costs (engraving, packaging, shipping) are not included in the $25 limit if they don’t add substantial value to the gift.
- Do not consider gifts $4.00 or less that you have your business name permanently engraved on the item, which you distribute on a regular basis.
- You have records proving the business purpose of the gift as well as details of the amount spent.
Deduction #12: Health Insurance
Health insurance premiums paid for you and your family may be deductible, as long as you and your spouse are not eligible for an employer-sponsored health plan. This includes medical insurance, dental, and long-term coverage.
Finally, it is always important to keep in mind that to be deductible, your real estate business expenses must be directly related to your business, ordinary and necessary. For a detailed list on tax deductions, refer to IRS Publication 535 and don’t forget to consult your own legal or financial adviser and verify all information to your satisfaction.
In regards to deducting commissions, does this include the commissions paid to the buyers agent when you are acting as the listing agent?
No, since the commission is taken out at the attorneys. Normally, to take the commission off it would have been paid to you, but pay it for the referral fee.
Great to know our client gift deductible amount is only $25. Thank you!
I have been told that a gift that contains your name, contact information, etc. can be claimed even if it exceeds $25.
Is that true?
Thank you for your comment. For any additional questions and clarifications, we recommend consulting a financial advisor and verifying all information to your satisfaction.
If it’s branded then the gift is considered marketing material, thus deductable.
I’m hoping somebody can answer this question for me. Normally you can Deduct home office expenses for the 12 months you use your office exclusively. If someone is on unemployment for nine months but of course you’re still trying to conduct work you’re just not making any money, do you only deduct the office for three months or do you use it for the whole 12?
Can you deduct inspections if you pay for them on behalf of your client?
It is a business expense. I would assume that as long as the client is not reimbursing you (you’re just the middle man) then it should be deductible.
Great question! I just did this!
First of all, your question is a great question. While I do not know the correct answer to it, I felt I would weigh-in and suggest readers exercise caution when they see words like “assume” and “should”. Words like these tend to lead some people to a conclusion that may not “necessarily” be actual, factual nor true. I’m just saying. Again, thanks for raising the question.
Can I write off inspections I paid for the buyer and a homw warranty I include with all sales.
This is an excellent and very helpful article. Being in the business for 25 years, I thought I knew everything I needed to know about taxes, but oh how I was wrong. I didn’t realize you couldn’t deduct your home office if you paid desk fees. Also, I had no idea the gift the government was giving us because of COVID, being able to deduct 100% of meals from a restaurant. Now that’s a win/win!! Thank you for all off these great tips.