Tax Deductions for Real Estate Agents

What are the primary tax deductions for real estate agents?

As a real estate agent, you have access to a variety of tax deductions that can significantly reduce your taxable income. These deductions fall into several categories, including business, home office, and travel expenses.
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Here’s the breakdown:

Business expenses

Business expenses are directly related to your work. As a real estate agent, the business-related expenses you can write off typically include:

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• Multiple Listing Service (MLS) listing fees
• Association dues and professional memberships, such as the National Association of REALTORS
• License fees and renewals
• Commissions received and paid to other realtors or staff
• Marketing and advertising costs (e.g., business cards, flyers, website hosting, etc.)
• Independent contractor costs, even if you don’t pay them above the $600 that would normally require you to file a 1099 form
• Office supplies and equipment
• Uniform expenses, as long as they contain your company’s logo or are designated as work attire (meaning that you do not wear this clothing elsewhere)
• Client gifts (up to $25 per person annually)
• Professional services (e.g., accountant, lawyer, or tax preparer fees)
• Insurance premiums related to your business
• Business meals—up to 50% of qualifying food and beverage costs (think: open house finger foods) or up to 100% for meals provided specifically for employees

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To claim these deductions, you must keep accurate records of all expenses, including receipts and invoices. It's important to note that these expenses must be ordinary (commonly accepted within your industry) and necessary for your real estate business to qualify for a deduction.

Home office expenses

You may also be eligible for home office deductions if you use a portion of your home exclusively for your real estate business. Home office expenses are pretty straightforward, as they include:

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• A percentage of your mortgage interest or rent
• Property taxes
• Utilities (electricity, water, gas)
• Home insurance
• Internet and phone services
• Home maintenance and repairs

To qualify for this type of deduction, the space must be used regularly and exclusively for your real estate business. You can calculate the deduction based on the percentage of your home used for business purposes or use the “simplified method,” which allows for a standard deduction of $5 per square foot of home office space up to 300 square feet.

Travel expenses

Real estate agents travel a lot for their work, especially when it comes to driving to and from showings and appointments. Deductible travel in real estate typically includes:

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• Mileage for business-related driving (there are two ways you can do this: Using the standard mileage rate, which is 67 cents per mile for businesses, or the actual expenses method, which involves totaling your expenses towards transportation and multiplying it by the percentage of your vehicle’s actual business use.)
• Parking fees and tolls
• Public transportation costs
• Airfare, hotel stays, and meals for out-of-town business trips

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It's crucial to maintain a detailed log of your travel, including the date, destination, purpose, and mileage tracked for each trip. Remember that commuting from your home to your office is generally not deductible, but travel between your office and client properties or other work-related destinations is.

Commonly missed deductions in the real estate industry

Many real estate agents who choose to file their own taxes often overlook important deductions that can lower their overall tax burden. Here are some commonly missed deductions in the real estate industry:

Commissions paid forward

As a real estate agent, you may sometimes split your commission with another agent or pay a referral fee. These commissions paid to others are fully deductible under the business expense category. Therefore, keeping track of any commission splits and referral fees paid throughout the year is essential, as they can add up to a significant deduction.

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For instance, if you earned a $10,000 commission on a sale but paid $3,000 to a referring agent, you can deduct that $3,000 as a business expense. This ensures you're only taxed on the income you actually received, which in this case, would be $7,000.

Brokerage fees aka desk fees

Many real estate agents work under a brokerage firm and pay various fees to their broker to use the space for business. These fees are often overlooked but are 100% deductible as business expenses. However, claiming these fees essentially means you cannot claim any home office expenses as you can only legally have one primary work space in the eyes of the IRS.

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Brokerage fees, which are also referred to as desk fees, can include:

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• Desk fees (if you’re paying for desk space)
• Technology fees
• Transaction fees
• Errors and omissions insurance premiums
• Administrative support fees

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Make sure to obtain a detailed breakdown of all fees paid to your brokerage throughout the year. These deductions can significantly reduce your taxable income, especially if you're with a brokerage that charges higher fees in exchange for a more favorable commission split.
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Many real estate agents work under a brokerage firm and pay various fees to their broker to use the space for business. These fees are often overlooked but are 100% deductible as business expenses.

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Continuing education fees

Real estate agents are often required to complete continuing education courses to maintain their licenses. You may also choose to participate in additional training to better support your clients. Either way, these educational expenses are also fully tax-deductible—as long as they’re real estate-specific—and typically include:

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• Course fees
• Consultation fees
• Textbooks and study materials
• Exam fees
• Travel expenses related to attending courses or seminars

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Additionally, any other professional development expenses, such as attending real estate conferences or workshops, can also be deducted. However, anything deemed as a minimum education requirement for another trade cannot be written off under this deduction category. For instance, if you’re a realtor participating in a home-flipping workshop, you cannot deduct this expense. This is because learning how to flip homes is considered an unrelated trade, and your write-offs must be related to educational experiences that allow you to maintain or improve the skills related to your specific industry.

Interest fees

Interest fees are another commonly missed write-off—and they’re 100% tax-deductible. This is also referred to as capturing interest fees, which essentially means that as a real estate business owner, the interest you pay on a business loan or line of credit can be recorded and deducted.

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To capture your interest fees, you must break your payments down into two transactions to account for the payment made toward the principal balance of the loan and the interest. Your interest will be recorded under the interest fee expense on your income statement, whereas your principal balance will be recorded under liability expense. Many business owners don’t realize this and make one lump-sum payment without reaping the write-off rewards on their business debts.

What real estate agents cannot deduct from their taxes

While there are many common and uncommon deductions available to real estate agents, it's equally important to understand what cannot be deducted. Tax deductions in the real estate business can be confusing for those filing on their own, so let's clarify what expenses are not eligible for deduction:

Personal expenses

Personal expenses are costs that are not directly related to your real estate business. The following cannot be deducted, even if they indirectly benefit your work:

• Personal grooming and clothing (unless it's a required uniform)
• General health club memberships
• Personal vacations, even if you do some networking while away
• Meals with friends or family, unless they are also clients and you're discussing business
• Personal vehicle payments or leases (even if the vehicle is used for work)

Non-business-related expenses

Non-business-related expenses are costs that may seem related to your real estate work but don't meet the IRS criteria for "ordinary and necessary" business expenses. These can sometimes be confused with legitimate business expenses, such as:

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• Political contributions, even if to a candidate supporting real estate-friendly policies
• Charitable donations, unless they're directly tied to marketing your business
• Speeding tickets or parking fines, even if incurred while driving to or from a showing
• Entertainment expenses that are not directly related to business discussions
• Gym memberships, unless you're a real estate agent specializing in fitness property sales and it's absolutely crucial for networking

Capital expenses

Capital expenses are costs associated with acquiring or improving assets that have a useful life beyond the current tax year. For real estate agents, these typically cannot be deducted all at once but must be depreciated over time, and they must be directly related to your business. 

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Capital expenses for real estate agents often include:

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• Purchasing a vehicle for business use (this refers to a portion of your upfront payment—not your ongoing payments)
• Buying office furniture or major equipment (like a high-end camera for property photos)
• Major home office renovations that increase the value of your home

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These expenses must be capitalized and depreciated over several years according to IRS depreciation guidelines. While you can't deduct the full amount in the year of purchase, you can deduct a portion each year through depreciation, which can still provide significant tax benefits over time.

How tax write-offs for real estate agents work

Understanding how tax write-offs actually work is crucial for any real estate professional tackling their taxes alone. It's important to note that deductions are not a dollar-for-dollar reduction of your tax bill. Instead, they reduce your taxable income, which in turn lowers your overall tax liability.

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In other words:

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• You calculate your gross income from all taxable sources (commissions, referral fees, etc.)
• Then, you subtract your eligible deductions from your total gross income
• The resulting amount is your taxable income, which is used to calculate your tax liability.

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For example, if your gross income is $100,000 and you have $20,000 in eligible deductions, your taxable income would be $80,000. Your tax liability is then calculated based on this $80,000, not the original $100,000. The actual tax savings from deductions depend on your tax bracket. If you're in the 22% tax bracket, a $1,000 deduction would save you $220 in taxes (22% of $1,000).

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It's also important to note that there are two avenues for claiming deductions:

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• Standard deduction: Claiming a set, flat amount that reduces your taxable income. The amount is predetermined by the IRS each year and varies based on your filing status.
• Itemized deductions: Claiming a list of your eligible expenses that you can choose to deduct if their total exceeds the standard deduction. You’ll likely need Schedule A Form 1040 for this.

As a real estate agent with numerous business expenses, you'll likely benefit from itemizing your deductions rather than taking the standard deduction. However, you should calculate both methods to determine which provides the greater benefit—and consult with an experienced tax professional to determine which option is right for you and your real estate business in the long run.

The required forms and documents real estate agents need to file

Real estate agents are typically classified as self-employed individuals. Therefore, you need to file specific forms and maintain certain documents to ensure your tax returns are accurate. 

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The forms and documents you'll likely need are as follows:

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• Schedule C- Profit or Loss from Business: This form is used to report income and expenses from your real estate business. It provides a detailed breakdown of your business financials for the tax year.
• Schedule C-EZ - Net Profit from Business: This is a simplified version of Schedule C for businesses with expenses of $5,000 or less. However, due to the nature and extent of their expenses, most real estate agents will need to use the regular Schedule C.
• Mileage log - for vehicle expenses: This should include the date, destination, purpose of each trip, and the number of miles driven. You can use this to claim either the standard mileage rate or actual vehicle expenses.
• Home office expenses worksheets - to track and record home office expenses: These worksheets help you calculate the percentage of your home used for business and the associated deductible expenses.

In addition to these forms, you should also be sure to maintain:

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• Receipts and invoices for all business expenses
• Bank and credit card statements
• 1099 forms received from brokers or clients
• Records of all income, including cash payments
• Documentation for any asset purchases and improvements

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Keeping these documents organized throughout the year will make tax preparation much easier and ensure you have the necessary documentation in case of an audit.

Tips for reducing taxable income as a real estate agent

While real estate agents have several options for reducing their taxable income, it's important to set realistic expectations. The goal is to legally minimize your tax liability, not eliminate it entirely. 

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Here are some effective strategies:

Maximize deductions by tracking expenses carefully

Maintain accurate records of all your business expenses throughout the year to ensure you don’t miss any eligible deductions. Use a dedicated business credit card and bank account to simplify tracking and ensure you don’t mix personal and business money. You may also want to consider using expense-tracking tools or software to capture receipts and categorize expenses to make it easier to maintain your records. 

Consider a home office deduction (if eligible)

If you use a portion of your home exclusively for your real estate business, don't overlook the home office deduction. This deduction can be substantial, especially in areas with high housing costs. Ensure you meet the IRS criteria for exclusive and regular use of the space for your business.

Utilize online tools or services to streamline bookkeeping

Invest in good bookkeeping software or services. These tools can help you categorize expenses, track income, and generate reports that make tax preparation much easier. Many of these services are tailored specifically for real estate professionals and can help ensure you're maximizing your deductions.

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Consult with a tax professional for personalized advice

While it's important to understand the rules for tax deductions for your real estate business, working with a tax professional specializing in the industry can be invaluable. They can provide personalized advice based on your specific situation, help you plan for tax-efficient business decisions throughout the year, and ensure you're taking advantage of all available deductions while remaining compliant with tax laws.

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Additionally, a tax professional can help you evaluate whether electing to file as an S corporation (while maintaining your LLC structure) could be beneficial for your tax situation. This strategy, often referred to as an "S corp election," can potentially offer tax savings for some real estate investors by allowing them to pay themselves a reasonable salary and take the rest of their income as distributions, which are not subject to self-employment taxes. A qualified tax advisor can analyze your specific circumstances, including your income level, business structure, and long-term goals, to determine if an S corp election would be advantageous for your real estate business.

Bench understands tax write-offs for real estate agents

Understanding tax write-offs is crucial for maximizing your real estate income and minimizing your tax burden. While the basic concepts aren’t difficult to understand, real estate taxation involves many nuances that can be challenging to navigate. 

Bench can offer you the knowledge, tools, and professional support needed to make a significant impact on your next round of tax deductions. Team up with Bench today and see how we can help you streamline your financial management.