Tax Deductions for Real Estate Agents – Car Expenses

There are plenty of ‘tax tips’ articles out there for real estate agents.  However, most of these articles provide nothing more than a general, overall understanding of what expense categories are considered eligible for federal tax deductions.  This article will attempt to explain how you can deduct car expenses as part of your business.  However, this is an overview, and should not be considered a substitute for sound, personalized advice from a tax professional.

This article will cover:

  • How to determine what business-related driving expenses are deductible
  • Two methods the IRS allows you to use
  • How you can build a system to record your mileage and car expenses for tax purposes

What is deductible?

According to IRS Publication 463, Chapter 4-Transportation, you can deduct car expenses for business transportation that are not already covered under travel expenses.  However, this can get confusing, so let’s break it down a little further into what this includes & what this doesn’t include.

What is included?

  • Transportation from one work place to another in the course of your business when you are traveling in the city or general area that is your tax home. For example, driving from your primary broker office to another broker office would be includible.
  • Visiting clients or customers.
  • Going to a business meeting away from your normal workplace.
  • Going from your home to a temporary workplace when you have more than one regular place of work. An example would include a temporary assignment at another broker’s office.
  • If you have a home office, and that is your primary place of work, you’re allowed to commuting costs. This for commutes to other work locations in the same trade or business, regardless of distance.

What is not included?

  • Expenses incurred when you are traveling away from home overnight. These expenses are covered under IRS Publication 463, Chapter 1-Travel.
  • Daily transportation expenses incurred while traveling from your home of record to your primary place of business. Other than what was previously mentioned in includible expenses, these are generally regarded as non-deductible commuting expenses.

These are general rules of thumb.  For more detail, Publication 463 contains a lot more detail, which you should refer to for more guidance on what is acceptable.

Standard mileage rate

The IRS allows you to use two different methods to calculate your deduction, the standard mileage rate or actual allowable expenses.  These are explained below, but if you’re allowed to take either expense, it’s worth the time to calculate each one and see which provides the higher tax benefit.  Let’s discuss each of the methods below.

Standard mileage rate.  The IRS generally allows you to calculate a deduction based on the amount of business miles multiplied by the IRS standard mileage rate.  For 2016, the IRS’ standard mileage rate is $.54 per mile.  For example, if you drove 8,000 miles that qualify for legitimate business purposes, you would multiply 8,000 by the $.54 mileage rate.  This gives you a deduction of $4,320.  However, there are some restrictions:

  • If you use the standard mileage rate for a year, you cannot deduct actual car expenses, which we’ll discuss in the next section.
  • If you choose to use the standard mileage rate for a car that you own, you must select it for the first year your car is available for business purposes. After the first year, you can then select either the standard mileage rate or actual car expenses.
  • If you choose to use the standard mileage rate for a car that you lease, you must use it for the entire lease period.
  • You must make the selection by the due date of your tax return (including extensions).
  • You cannot claim the standard mileage rate if you:
    • Use 5 or more cars in the same business
    • Used and claimed accelerated depreciation for the car
    • Claimed a Section 179 deduction on the car
    • Claimed actual expenses for a car that you leased
    • Claimed a special depreciation allowance on the car
  • There are certain deductible expenses that you can include even if you use the standard mileage rate:
    • Personal property taxes. These are generally claimed as an itemized expense on Schedule A of your tax return.  However, if you’re self-employed, you can deduct the business-related portion of your personal property taxes on Schedule C of your tax return, and the remainder on Schedule A.
    • Parking fees and tolls. You can claim these in addition to the standard mileage rate.
    • If you are self-employed, you can deduct the interest expense related to business use of your car.  For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040).  However, this only applies to self-employed individuals.  You cannot deduct interest expense as an employee.

Actual car expenses

If you’re not eligible to deduct standard mile rate, or if you choose not to, you can deduct actual car expenses related to your business.  Before we discuss which expenses are covered, it’s important to note that you must divide your expenses between business & personal use.  This is done by figuring out the following:

  • Total amount of miles driven in a tax year
  • Total amount of miles directly related to business
  • Total amount of personal miles

For example, if you drove 20,000 miles in a year, and 8,000 were for business, then the other 12,000 were personal use miles.  Once you know these numbers, you divide the business miles by the total miles to reach a percentage.  In this case, it’s 40%.  This means that you can deduct 40% of all allowable car expenses as business use expenses.  So, what are allowable car expenses?

  • Depreciation (beyond the scope of this article)
  • Gas
  • Oil changes
  • Tolls
  • Lease payments
  • Insurance
  • Garage rent
  • Parking fees
  • Registration fees
  • Repairs & maintenance
  • Tires

If you decide to use actual car expenses, IRS Publication 463 has detailed guidelines that cover questions not covered.  You will definitely want to refer to this when trying to calculate vehicle depreciation cost.  This topic is too complex to cover in this article.  However, to wrap up this article, we’re going to talk why it’s important to have a system to track costs & mileage, and how you can do so.

Building a System

Since the business vehicle deduction is prone to abuse, the IRS takes a skeptical eye towards it.  If your records are ever audited, it’s very important for you to be able to detail exactly how you record your expenses & mileage.  If done properly, the IRS will be able to understand your rationale, determine that your recordskeeping is in order, and allow you to keep the deduction.  If not, you could find that your deduction is disallowed, and you will have to recalculate your tax liability.  Below are some points that you should consider:

Mileage.  Regardless of which method you choose (standard mileage rate or actual car expenses), you will have to have a way to record your business-related mileage.  The IRS requires you to keep accurate records of each business-related trip.  Each trip entry should contain:  date, starting point, ending point, purpose, starting mileage, ending mileage.  While it used to be cumbersome to do this by hand, fortunately there are apps, such as MileIQ, Everlance, and Expensify, which can help you streamline this record-keeping process.  It’s well worth the subscription fee ($100 per year or less, depending on the service) to simplify the cost of all your business-related driving.  You’ll more than make up for the cost with the deduction.

Choosing between mileage and actual car expenses.   While the IRS recommends calculating both methods to determine which gives you the ‘bigger bang,’ the IRS also likes consistency.  Flip-flopping between standard mileage and actual expenses can throw up a red flag, which you want to avoid.  Since you can always elect actual expenses, you should probably start off with standard mileage rate calculation for at least the first year.  If you don’t, then you’re stuck with using actual expenses for the rest of your car’s life, even if the mileage rate ends up being the better option in a future year.  Also, keep in mind the situations which might force you to use actual expenses.

Avoiding the best of both worlds.  Remember, the IRS is pretty savvy at preventing you from taking the best of both.  For example, if you use an accelerated depreciation (such as Section 179, which has its advantages), you can NEVER use the standard mileage rate for that car.  If you use standard mileage rate for a leased car, you have to use it for the entire lease term.  Just know that if it sounds like double-dipping, the IRS will probably not allow it, unless it’s clearly specified in Publication 463.

This article is not a substitute for tax advice for your individual situation.  Do you have any questions about what is deductible and what is not?  If so, please feel free to shoot me an email to me at:  forrest@westchasefinancialplanning.com and I’d be more than happy to research it for you.

Four VA Loan Considerations for Real Estate Agents

Real estate agents:  This is an article I originally wrote for military members.  Even if you don’t have much experience working with servicemembers, I hope this article serves you well.  Many of your ‘civilian’ clients may also be using a VA loan to fund their home purchase. They might also have a VA loan on the home they’re trying to sell. This article is intended to focus on working with active duty clients, but these principles do apply to veterans as well.

Although military families are very experienced in evaluating neighborhoods and renting homes, buying a home is a whole different story.  In this regard, they are very much like a lot of your civilian clients, and they rely upon you to guide them to a good decision.  As you know, veterans and servicemembers are able to use their VA loan benefits, which helps them finance a new home purchase, even with no money down.  Having access to a VA loan is a great opportunity, but that opportunity comes with a risk most people don’t have to face.

Note:  Although I originally wrote about three considerations regarding VA loans, I added a fourth because as a real estate agent, you might be on either side of a transaction, so it’s important to see this from both perspectives.

What’s a VA Loan?

One of the benefits of joining the military is being eligible for a VA loan.  A VA loan is a mortgage provided by a private lender, sponsored by the Department of Veterans’ Affairs.  VA loans help servicemembers and their families qualify for home mortgages by guaranteeing a portion of the loan, allowing lenders to provide the loan at competitive rates.  Some of the major benefits include:

  • Being able to get a mortgage with little or no down payment
  • Not having to pay private mortgage insurance (PMI) for a home with less than 20% equity
  • Streamlined refinancing, also known as Interest Rate Reduction Refinance Loan (IRRRL).  As interest rates go down, an IRRRL allows a lender to refinance a mortgage with much less paperwork.

With that said, buying a house is a significant undertaking.  Regardless of the type of loan, a prospective homeowner should do a lot of due diligence, research, and budgeting to ensure they’re able to afford the home.  With VA loans, here are four considerations:

  1. 100% financing is possible with a VA loan, but is it prudent?

Lenders generally require a 20% down payment on the purchase of a home, or they will require that the borrower obtain private mortgage insurance.  This is to protect the bank’s investment in the case of a default.  However, there is another argument that can be made that indicates ‘skin in the game’ is an important consideration.

For example, this theory states that a couple buying a $250,000 home would be much less likely to default on a mortgage if they paid a $50,000 down payment, than a couple buying a similar home with zero down payment, since the first couple made a considerable investment.  While there are studies that support both sides of this argument, we can at least assume that a couple with the financial discipline to have saved $50,000 in the first place may be better positioned to pay their mortgage than the couple that did not.

Instead of trying to finance 100% of a home purchase, it might be more prudent to save money for a down payment.  When  considering a home purchase within 5 years of retirement, a servicemember needs to seriously consider whether that house is going to be the one that they’ll live in during their transition.  If you think you’ll move after retirement or separation, you need to think twice about committing to a home purchase in the first place.

  1. The costs of a VA mortgage should still be compared to the costs of a traditional mortgage. 

First, there is a VA-mortgage funding fee.  This can range from .5% of the mortgage for an IRRRL to 3.3% for a zero-percent down purchase of a subsequent purchase.  There are several exceptions to the VA’s fee policy.  For a veteran receiving disability benefits, or a surviving spouse of a veteran who died in service or from a service-related disability, this fee is not applicable.  However, most people should plan to calculate the VA funding fee into the cost of their mortgage.  There are also other considerations, such as types of closing costs that can be included in a VA loan, and other restrictions.

Also, interest rates differ for VA mortgages than from conventional mortgages.  This may or may not be a significant difference.  However, you should run the numbers (down payment, total closing costs, principal and interest) for a VA & conventional mortgage.

  1. The same homeowner can have more than one VA-sponsored mortgage at a time, depending on the circumstances. 

We bought our first house in Norfolk in 2002, then refinanced 3 times over the following 12 years, going from 6.75% down to 3.5%.  Each time we refinanced, we did so under the VA’s IRRRL program, which minimized paperwork at minimal cost.  Also, each time we refinanced, the VA reset our mortgage balance and issued a new certificate of eligibility.

In 2014, we purchased our current home in Tampa.  Because we had used much less than our entitlement (then $417,000) for our Norfolk house, we were able to use the remaining entitlement amount on our Tampa home and have a second VA-backed mortgage.  We still needed a down payment, but this was something we had planned and budgeted for.  Servicemembers do move around a lot in the military.  As a result, they may be in a position of being able to buy a second (or third) property inexpensively.

  1. In five years, will this place still be a primary home, or a rental? 

Ask yourself twice, then run the numbers to see how it will work as a rental.  Unless this is a retirement home, if it doesn’t work as a rental, your clients shouldn’t buy it.  Most servicemembers buy a first home that is much smaller than the one they want to raise a family in.  However, these servicemembers often end up getting having to rent it out because they have to relocate.

Trust me-I’ve got the horror stories to prove it.  You’re in the best position to help your military clients make the right decision.  You can do this by helping them figure out what they can afford.  You can also ask tough questions to make sure they’re the right clients for you.  It might not be great to get a client into a smaller house than they would have gone for.  It’s even worse to convince that client this isn’t a good time for them to buy a house.  However, you’re in the best position to know what type of house your clients belong in.  The goodwill you generate will come back to you in the long run.  Much more than that slightly larger commission check.

There are many other variables that can impact the decision to use a VA-sponsored loan.  There is a lot of information on the VA’s website, www.benefits.va.gov.  Also, most lenders have specialists who are knowledgeable about VA loans.  These lenders can walk your clients through the process of applying for a VA mortgage.  If you have a client who is overwhelmed, you should help them schedule an appointment with a fee-only financial planner.  Working with a trusted professional is the best way to make sure that your clients make the right decision.

As always, this blog serves to answer your questions and address concerns.  If you like this blog, please forward it on to other people who may benefit.  If you have issues or concerns, or if you have a question you’d like to have me answer, please feel free to contact me.  You can reach me through my website, www.westchasefinancialplanning.com, or via email at forrest@westchasefinancialplanning.com.  In the meanwhile, take charge of your life!