It’s almost that time of year…tax season! Although it’s not the most fun—or even something we look forward to—it’s a necessary evil. On the up side, unlike other professionals, real estate agents are lucky in that they have a lot that they can write off. In order to be able to do so, however, it’s important you have the correct documentation, so start sifting away!
Below is our list of the top five tax breaks for real estate agents. Start getting your paperwork in order now to make tax season 2014 a breeze!
Deduct Car Expenses
Being an agent means driving around to meet with a lot of clients, show a lot of listings, host a lot of open houses, etc. Therefore, why don’t you start by writing off your mileage? Start keeping track of your mileage by writing down your miles driven from your odometer every time you hit the gas station. You can keep this record in a hand-written file, on your phone or on your computer as an excel spreadsheet. In 2014, the standard mileage rate is 56 cents per mile. However, before you start calculating your write-off, make sure to deduct the miles driven commuting to and from your home to work.
Furthermore, according to the IRS’ website, “Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.” This would include spending for gas, repairs, oil, car washes, etc. Make sure to obtain third party documents for all services, even your mileage, which can be procured after getting an oil change.
Aside from mileage and maintenance, if you’ve recently purchased a new car, you may be able to write it off under Section 179. Keep in mind that there is a weight limit on the vehicle and a dollar limit on how much of the purchase price you can write off. The IRS states, “You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets…” However, this is for a vehicle weighing more than 6,000 pounds (the average car weighs 4,000 lbs). Land Rover dealership, here we come!
Deduct Office Expenses
If you work out of a business office, for example, a broker’s office that you own, you can deduct the cost of rent and utilities. Some expenses are considered current, meaning they will be deducted in the year that they are paid, whereas others are labeled capitalized and are depreciated or spread out over time.
When it comes to a home office, things get a bit trickier. According to IRS Topic 509, requirements to be considered a home office include an area that is used:
1. Exclusively and regularly as your principal place of business for your trade or business
2. Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business; or
3. A separate structure used exclusively and regularly in connection with your trade or business that is not attached to your home
4. On a regular basis for certain storage use
5. For rental use
6. As a daycare facility
While the latter two options really don’t apply, it’s important to pay careful attention to the first four. Note the word “exclusively.” This means that you can’t use the room for any other purpose, even after hours. Another important thing to note: the home office doesn’t have to be a full room; it can be a part of a room, as long as it’s clear that it’s used as a business space.
How much you can write off depends on the ratio of home office size to home size. You can use IRS Form 8829 to calculate home office write offs by percentage of square feet or by number of rooms. Once you have this number, apply it to your home office expenses to see how much you can deduct. Another option, available as of 2013, is to take a standard deduction of $5 per square foot of office space, up to 300 square feet, the maximum deduction being $1,500.
For home owners, home office expenses include mortgage interest, real estate taxes, homeowners insurance, cleaning expenses, maintenance, an alarm system, casualty losses, property tax, utilities and repairs. Furthermore, homeowners can depreciate a portion of the cost of their house.
If you’re a renter, great news! A portion of your monthly rent can be written off.
Now, what happens if you work at both your home office and your broker’s office? As long as your home office still qualifies as your “principal place of business,” you still qualify for the write off. How do you determine if it’s “principal”? In Publication 587, the IRS states that you must consider “The relative importance of the activities performed at each place where you conduct business and the amount of time spent at each place where you conduct business.” Basically, where you conduct important activities and spend the most time is your principal place of business. What they mean by “important activities” is “administrative or management activities,” which include:
• Billing customers, clients, or patients
• Keeping books and records
• Ordering supplies
• Setting up appointments
• Forwarding orders or writing reports
Deduct Business Travel and Entertainment
If you’ve travelled for real estate business this year, whether to attend a conference or meet with an out of town client, you can write off your transportation and lodging expenses. When it comes to food, however, you can only deduct 50 percent of the cost of meals.
Entertaining a client on the road or in your home town? If you’d like to deduct the cost of a meal or an entertainment event, the entertainment must take place “directly before or after a substantial business discussion.” The IRS Publication 463 elaborates by stating that as long as the entertainment takes place on the same day as said discussion, it’s considered to be held directly before or after (why didn’t they just say that in the first place?). Like business travel meals, only 50 percent of the cost of the meal or “entertainment” can be deducted.
Deduct Professional Services
Many agents outsource business, whether it’s to freelance writers, attorneys, marketing agencies, accountants, photographers, consultants, graphic artists, SEO specialists or web designers. Fees that you pay to these professionals for work related to your real estate business can be written off. Check out the IRS Publication 535 for more information.
Business liability insurance, insurance for business property or any insurance bought exclusively for your real estate business is deductible. As mentioned before, you can deduct a portion of your homeowners insurance if you work out of a home office. Additionally, according to an IRS Tax Tip, if you are self-employed, you are allowed a 100 percent deduction of all “medical, dental or long-term care insurance premiums.”
Feeling a bit more prepared to take on the 2014 tax season? We hope this breakdown of the top five tax breaks for real estate agents was helpful, and wish you the biggest refund yet!