5 Tax-Filing Tips for Real Estate Agents

The deadline to file your taxes is right around the corner. As stressful and busy this time of year can be for CPAs, it can be just as overwhelming for agents, brokers, and REALTORS who need to scramble to file their taxes on time and correctly. Because many people working in this industry do not work on salary but commission, tax season can often present some less-than-desirable surprises, typically when you find out how much money you’ll need to owe to the IRS. It may be too late this year, but if anything, these tax filing tips for real estate agents can help you from this point forward, making next year a breeze—as long as you stay organized.

1) Understand What “Self-Employed” Means

The first step in understanding taxes as a real estate agent, broker, or REALTOR, is to know more about the process. Sure, any person in the industry can hire a CPA, but, it’s crucial to know where you stand in the eyes of the IRS. This is so you can be aware of your tax responsibilities, while at the same time, being able to ask the right questions.

First and foremost, most of those working in this industry are considered “self-employed.” This means that you don’t have taxes withheld from your paycheck every month. Though that might sound nice in theory, you’re still expected to pay a self-employment tax, which means that you’re essentially paying into your own social security. This is, of course, in addition to the amount of income tax you have to pay. Knowing this information from the get-go is essential to understanding how your taxes work.

2) Know What You Can Write-Off

Most self-employed people, whether in real estate or not, will be doing what they can to reduce how much they owe on their taxes, by writing off every possible expense imaginable. However, too many of these self-employed people think they can write-off any expense they want, only to find out later that a majority of those things are not tax-deductible.

Some potential expenses you can write-off:

• Driving expenses (with some exceptions)
• Office rent (this is not the same as a home office)
• Self-employed health insurance benefit
• Retirement plan contribution
• Marketing and advertising expenses
• Anything used to compliment an open house
• Fees, licenses, test expenses, etc.
• Training or professional developments
• Business equipment, such as an iPad 
• Technology used for work
• Payment to people you hire, such as a virtual assistant

Remember that these are just general guidelines, and you must talk to a licensed tax preparer to learn what you can and cannot write-off.

3) Keep Track of Your Expenses Throughout the Year

Once you know what you can and cannot write-off, it’s necessary that you keep track of your expenses throughout the year. Many people wait until March to sit down and go through what their list of expenses. While most banks have charts and statements you can download to see where you’re spending went, it would be hard to determine what went to business expenses and what was merely for personal use. 

Luckily, there are a few ways to help you determine your expenses. The first thing you can do is open a bank account that is just for any purchases associated with your business—purchases that you can write-off. The next thing you can do (and, should do, in addition to having a separate bank account) is to go over your expenses every week. 

Many agents, brokers, and REALTORS will hire a bookkeeper to help them with this (which, you can also write-off). If you’re not for the old-fashioned way of doing things, there are many apps that can help you track spending, such as Mint. However, keep in mind that nothing will track your expenses as well as you doing it yourself!

4) Put Away 20% of Every Commission

According to Michael Damsky, a CPA in New York of more than 50 years, “The biggest mistake brokers make is not putting away money for taxes each time they make a commission.” If agents, brokers, and REALTORS want to have a stress-free tax season, it’s imperative to put away a portion of each commission you get for taxes. Michael says this should be around 20% of each commission. This way, when that deadline comes, you’ll have much less to be concerned about.

5) Pay Quarterly to Avoid Underestimated Penalty

Another word of advice Michael gave for real estate agents, brokers, and REALTORS, is to pay your “estimated tax” quarterly, or, four times a year. 

In general, what you can do to figure out this number is to take whatever you owed the previous year, and divide it by four. Then, on the quarterly tax deadlines—April 15th, June 15th, September 15th, and January 15th of the following year—pay what you estimate that you owe. If you do this throughout the year and pay at least as much as you paid the prior year, then you will not be charged a penalty by the IRS. Most importantly, though, you’ll also be able to get rid of any worries associated with tax deadlines.

Once you know all of this information, taxes will start to feel as easy as showing a home. Though, the best way to go about filing your taxes is to have a reliable CPA that has experience working with real estate agents, brokers, and REALTORS.

Do you have any other tax-filing tips that have helped you? Let us know in the comments below!