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: and I’d be more than happy to research it for you.

Estimated Taxes For Real Estate Agents

Estimated Taxes for Real Estate Agents

Did you know that if you’re a self-employed individual, you must pay estimated taxes on your income?  As a real estate agent, this is a very important issue, especially if you aren’t a salaried individual, who might have taxes withheld by an employer.  While mastering this topic isn’t going to make your business bring in more revenue or become more effective, ignoring it completely can result in an IRS letter which can interrupt you at an inconvenient time or worse, severely disrupt your cash flow if you end up owing for back taxes, penalties, and interest.  This article aims to help you conceptualize estimated taxes so that you can:

  • Why you need to understand estimated taxes
  • Understand exceptions that may apply to real estate agents
  • Figure out how to budget for and systematize estimated taxes
  • Determine whether this is something you might want to automate by hiring out or do yourself

Why do I need to know about estimated taxes? 

Let’s talk about why this matters.  According to the IRS, “estimated tax is the method used to pay tax on income that is not subject to withholding.”  If you are a sole proprietor, partner, S-corporation shareholder, or self-employed individual, the IRS requires you to pay estimated taxes if you expect to owe $1,000 or more when you file your return.  Assuming that your tax year corresponds with the calendar year (like individual tax returns do), the IRS requires estimated taxes to be paid on a quarterly schedule with payments due on:

  • April 15
  • June 15
  • September 15
  • January 15 (of the following year)

If the IRS determines that you did not pay enough in estimated taxes, then it may assess you an underpayment penalty.  The IRS will also charge you interest until the owed amount is paid in full.

Exceptions to the estimated tax withholding mandate.  

There are times where you may be exempt from penalties for not having paid estimated taxes.  Since one or more of these situations might apply to you as a real estate agent, especially if you’re starting out, let’s take a quick look at the exceptions:

  • If you didn’t pay any taxes in the previous year. For example, perhaps you just graduated college, turned 18, or you’re just starting out, and your income was low enough that you didn’t have a tax liability.  Note:  if you’re married, you should take your spouse’s income into account when figuring out how low your income is.
  • If your current year’s tax is less than $1,000. Again, this might happen if you’re just starting out.
  • If your total tax bill, minus previous withholdings, is less than $1,000 at the time your tax return is due. For example, perhaps you transitioned from a previous job, and your employer had withheld enough so that you were expecting a refund or a small payment.
  • If your total withholdings and estimated taxes are at least as much as your previous year’s taxes. So, let’s say your business takes off this year.  You made $50,000 last year, and you’re on track to make $150,000.  As long as your estimated taxes are at least as much as last year’s (based upon the $50,000 number), you won’t be penalized if you don’t pay on the $150,000 number.  With that said, this should be looked at as the IRS giving you leeway to do the right thing, not to blow off estimated taxes.
  • If the tax due is no more than 10% of the total taxes, and you paid all estimated taxes on time. For example, your total bill is $10,000.  You paid $9,500, with all your estimated taxes on time, and you owe $500 by your filing deadline.  You simply complete your return, send the $500 to the IRS, and don’t owe any penalties.  So, let’s think about how we get to this point.

How do I properly calculate and withhold estimated taxes?

Below, I will point out the step-by-step instructions on how you do this, so that you can understand the concepts and budget for it.  You can do this manually (which is probably suggested for the first year or two, so that you can understand it), or you can automate this process by hiring a bookkeeper, accountant, or enrolled agent to do this for you.  Once your career demands more and more of your time, you’ll find that hiring this function out should definitely be at the top of your to-do list, but you’ll want to understand the process for yourself so you can still hold your tax professional accountable and ask relevant questions when you need to.  After all, you are still responsible for your tax liability, even if you hire the work out, so it’s important to understand it.  With that said, here we go.

1.  You will want to forecast your total commissions and business expenses for the year.  In order to understand your tax liability, you need to know what your income and expenses are, or have a rough estimate.  If you don’t know where to begin, you can start by looking back on the previous year’s records.  Based upon the way your business is growing, you should be able to use this as a baseline to predict what your future commissions and expenses will be.  Subtract your business expenses from your predicted commission to determine your net income.

Example:  Let’s assume you start with $100,000 in gross income.  We’ll use this number as the example as we go through the rest of these instructions.

2.  Calculate self-employment tax based upon your projected income. You have to pay self-employment tax on your income.  Let’s differentiate this from your wages as a W-2 employee.  As an employee, you pay Social Security & Medicare (also known as Federal Insurance Contributions Act, or FICA).  You pay half, as part of your withholdings, and your employer pays half.  Although there are certain limitations and additional taxes, based upon your income, generally this number is 7.65% for yourself, and 7.65% for your employer, for a combined total of 15.3%.  As a self-employed individual, you are responsible for both ends of this tax.  Since there is a phase-out period on Social Security (you don’t pay Social Security on any amount above $118,500 for 2016), this can get difficult.  You can either this manually by downloading a copy of the IRS Worksheet 2-3 from Publication 505 (Tax Withholding and Estimated Tax).  However, it might be easier to go to an online self-employment tax calculator and let it do the math for you.  Bankrate and Jackson Hewitt both offer online calculators that do this very quickly for you.

Example: self-employment tax on $100,000 equals $14,130.  That would be $11,451 in FICA & $2,678 in Medicare.

3.  Divide your self-employment tax amount by two. I want to explain this step, so you understand the impact that self-employment tax has on your net income.  You are allowed to deduct ½ of your self-employment tax from your income for income tax purposes.  Just keep in mind that you’re not allowed to deduct all of the self-employment tax, so if you’re calculating by hand, you need to divide the total self-employment tax by 2 to get to the amount that you’re able to deduct.

Example:  Dividing self-employment tax by 2 gives you $7,065 in deductible self-employment tax.

4.  Subtract ½ of your self-employment amount from your net income. As explained, this is what you’re entitled to, so actually subtract this amount from your previously calculated net income.

Example:  $100,000 minus $7,065 equals $92,935.  This is the number that you will subtract your deductions and exemptions from to calculate your taxes.

5.  Calculate your Adjusted Gross Income (AGI).  This involves subtracting out adjustments to income.  Some of these adjustments include:

  • Alimony payments
  • IRA contributions
  • Deductions for tuition and fees

You should know what other adjustments you’re entitled to from last year’s tax return.  If your situation has significantly changed, you might want to consult a CPA or enrolled agent to make sure you’re taking all of the deductions you’re entitled to.

Example:  If you paid $5,000 in tuition, and contributed $3,000 to your traditional (not Roth) IRA, this brings you to $84,935.  This number is your AGI.

6.  Subtract your standard or itemized deductions from your net income from step 4. Estimate your itemized deductions or obtain the standard deduction form from the IRS website. Make sure you compare your itemized deductions to the standard deductions allowed for the tax year to maximize your deduction.

Example:  If you estimate $15,000 in deductions, this brings your income down to $69,935.

7.  Subtract the personal exemption allowed for the year from the new number in step 5. For 2016, the personal exemption is $4,050 per person in the household.

Example:  If you have a spouse and one child, you would have three exemptions.  This brings your income down to $57,785.

8.  Calculate the amount of federal tax due on your adjusted gross income (the amount calculated in step 6).  You can look up the tax tables on the IRS website, or you can find a tax calculator on Jackson Hewitt .

Example:  Using 2016 tax rates, the estimated income tax on $57,785 for a married couple filing jointly is $7,740.25.

9.  Add your total estimated federal tax due to the total estimated self employment tax due. Then divide this total by 4.

Example:  $14,130 + $7,740.25 equals $21,870.25, which results in $5,468 (rounded up to the nearest dollar), in quarterly payments.

10.  Make estimated quarterly tax payments of the amount calculated in step 9. Estimated quarterly tax payments are due on April 15, June 15, September 15, and January 15 of each year.  If the payment date falls on a weekend, the due date falls to the following business day.

A quick note.  You should compare your estimate tax liability.  If your current year’s tax liability is less than last year’s, you may want to use last year’s number for quarterly tax purposes.  If you are wrong, you will avoid underpayment penalties as long as you paid 100% of last year’s tax liability on time.

For example, if your total estimated tax bill this year comes out to $6,000 and last year’s number was $7,000, you should use the $7,000 figure for quarterly payments.  That way, if you end up with a banner 4th quarter and end up owing $8,000 in taxes, the IRS will not assess a penalty.  You will still owe $1,000 in taxes when you file your return, but there won’t be a penalty assessed for under withholding.  If, on the other hand, your bill comes in at $6,000, then the IRS will issue you a $1,000 refund.

Should I calculate estimated taxes myself, or should I hire this out?

If you’re truly focused on establishing & growing your real estate business, you should have a tax professional do this for you as soon as you can afford to.  However, it makes sense to have a good understanding of your tax liability for several reasons.

  • You’re responsible for your tax calculation, and the proper payment of taxes. So, unless you can prove to the IRS that your tax professional (only an attorney, CPA, or enrolled agent qualify as tax professionals in the eyes of the IRS) misled you or provided bad tax advice, the IRS will hold you responsible for any underpayments.
  • If you hire this out, you need to understand the process so that you can ask informed questions. Asking informed questions is the best way to ensure that you’re getting the tax advice you’re paying for.
  • Tax planning. The more you know about how the process works, the more likely you are to make tax efficient business decisions.  It just makes business sense.

So, how do I automate estimated taxes? 

  • You can use software like TurboTax to help you file your taxes.  This might be the way to go to help avoid calculation mistakes.  However, software won’t be able to help you identify opportunities for tax planning (not as well as an actual person, anyway).
  • Hire a bookkeeper. You can hire a bookkeeper to manage your books, and you probably should do so as soon as you can hire that service out.  There are some professional enrolled agents and CPAs who perform bookkeeping services on the side.  However, it may be more expensive to hire them.
  • Hire an accountant or enrolled agent. As your career takes off, it may become more complicated.  This is especially true if you plan to invest in real estate or establish other business lines.  Having a long term relationship with a tax professional, such as a CPA or EA, will allow you to identify tax planning opportunities.  Proper tax planning can save you thousands, if not tens of thousands, of dollars over your career.

Why you should automate

This is simple.  Any business owner should automate or hire out any function which isn’t a core part of his or her business.  If you’re a real estate agent, then your value proposition lies in your relationships, and your ability to connect with buyers, sellers, and other agents.  Doing taxes takes you away from your core competency.   Additionally, doing taxes is a mental drain that leaves you less than focused on your business.  And quite frankly, if you like taxes, you should become a CPA or enrolled agent, not a real estate agent.

I hope this article helps you understand more about your estimated tax situation.  However, this article is not a substitute for customized tax advice.  For a more professional assessment of your personal estimated tax situation, you should contact your local tax professional.  If you don’t have one, feel free to email me or contact me through my website.

Tax Deductions for Real Estate Agents – Entertainment 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 help conceptualize what types of real-life entertainment expenses can be eligible for tax deductions under federal law.  However, this is an overview, and should not be considered a substitute for sound, personalized advice from a tax professional.  Also, this primer does not provide legal advice–you need to take steps to ensure that your advertising campaigns comply with applicable federal, state, and local regulations.

This article will cover:

  • The specific IRS reference that helps determine deductible entertainment expenses
  • Eligibility criteria
  • The 50% rule, which provides the general guidance for deducting entertainment expenses
  • Exceptions to the 50% rule
  • Examples of entertainment expenses that real estate agents can claim

What Does the IRS Say About Entertainment Deductions?

The IRS policy regarding tax deductibility of entertainment expenses is contained in Chapter 2 of IRS Publication 463, Travel, Entertainment, Gift & Car Expenses.  Chapter 2 specifically discusses business-related entertainment expenses, and outlines what is eligible, and what is not.

According to Chapter 2, you can deduct entertainment expenses only if they are both ordinary & necessary and either the directly-related test or the associated test.

Before we go further, below are the IRS-defined terms outlined above in bold:

  • Ordinary expense: One that is common and accepted in your trade or business.  For example, providing appetizers & bottled water as part of an open house is common and accepted in the real estate world.
  • Necessary expense: One that is helpful and appropriate for your business.  Verbatim from IRS Pub 463:  “An expense doesn’t have to be required to be considered necessary.”   Using the above example, providing appetizers isn’t required to conduct an open house, but can be considered a necessary expense for tax purposes.
  • Directly-Related Test: To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:
    • The main purpose of the combined business and entertainment was the active conduct of business
    • You did engage in business with the person during the entertainment period AND
    • You had more than a general expectation of getting income or some other specific business benefit at some future time.
    • An example would be taking a prospective client out for a cup of coffee to talk about their needs
  • Associated Test: If your expenses do not meet the directly-related test, they may meet the associated test.  In order to do so, you must show that the entertainment is both:
    • Associated with the active conduct of your trade or business. This means you can show that you had a clear business purpose for having the expense.  That purpose might be to get new business or to encourage the continuation of an existing business relationship.  Hosting a networking event would meet this requirement as long as you’re able to document that this is to grow your business.
    • Directly before or after a substantial business discussion. Unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or other specific business benefit, it will not be considered a substantial business discussion.  This meeting doesn’t have to be for a specific length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment.
    • The IRS points out a couple of additional points:
      • Meetings at conventions: If you attend meetings at an industry convention or similar event, this would be considered a substantial business discussion as long as your reason is to further your trade or business.
      • Directly before or after business discussion. If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion.

What is the 50% rule, and how does it pertain to entertainment expenses?

Simply put, the 50% rule means that you’re allowed to deduct 50% of the total business-related meal and entertainment expenses.  This rule applies to employees or employers, and to self-employed persons, including independent contractors.  If you are reimbursed by your employer or clients, then they would be eligible to deduct 50% of the meals and entertainment expenses from their costs, not you.  This limit applies to business meals or entertainment expenses while:

  • Traveling away from home on business
  • Entertaining customers at your place of business, restaurant, or other location, or
  • Attending a business convention, reception, business meeting, or business luncheon

In essence, any entertainment expense that is allowed is subject to the 50% limit.  However, there are exceptions.

What are the exceptions to the 50% rule?

There are 5 exceptions to the 50% rule, but the following are the ones that might apply to real estate agents:

  1. Employee’s reimbursed expenses. If you are under an accountable employee reimbursement plan, then your employer should not consider your reimbursed expenses as income.  This is a wash:  you don’t have income, you don’t get the deduction.
  2. Self-employed. If you are self-employed, and your client or customer reimburses you or gives you an allowances for expenses in connection with your services, then your client or customer is eligible for (and subject to) the 50% rule, not you.
  3. Advertising expenses. If you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting community goodwill, you are not subject to the 50% rule.  IRS cites TV & radio sponsorships or distributing free food and beverages to the general public as fully deductible.  Keep in mind, an open house would be considered open to the general public, but a limited or private showing would not.

What types of entertainment expenses are deductible?

The following descriptions and examples are directly from Publication 463:

  • Includes any activity generally considered to provide entertainment, amusement, or recreation.  Specific examples include:
    • This includes cost of food, beverages, taxes & tips.  You or your employee must be present when the food or beverages are provided.
    • Trade association meetings. You can deduct entertainment expenses that are directly related to and necessary for attending meetings of certain exempt organizations if the expenses are related to your active trade or business.  This includes business leagues, chambers of commerce, real estate boards, trade associations, and professional associations.
    • Entertainment tickets. Generally you can only deduct the face value (without service fees) for tickets, even if you paid a higher cost.  Skyboxes or luxury seats to a sporting event are specifically limited to the cost of a nonluxury box seat ticket.  However, you can separately deduct food and beverage costs for skybox or luxury seats, subject to the 50% limit
      • Charitable events. There is an exception in which you can deduct the full cost of the ticket if the event’s main purpose is to benefit a qualified charity, the entire net proceeds go to the charity, and the event uses volunteers to do substantially all of the work.
      • Example: you buy tickets to a golf tournament organized by the local volunteer fire department, where the proceeds go to purchase new fire equipment.  The event is run by the volunteers.  The full cost of the tickets are deductible.

What types of entertainment expenses are not deductible?

The following descriptions are specifically excluded under Publication 463:

  • Club dues & membership fees. While business memberships are generally deductible, they are NOT deductible if the primary purpose of the organization is to provide entertainment activities for their members.  For example, dues for a local real estate group, whose primary goal is to meet for the purpose of business development, are deductible.  However, dues to a country club whose membership rules require their members to be members of the real estate industry, would not be.
  • Entertainment facilities. Generally, you cannot deduct any expense for use of an entertainment facility.  This includes depreciation expenses or rent, utilities, maintenance, or other costs.
  • Spouse expenses. You cannot deduct the cost of entertainment of your spouse or a customer’s spouse.
    • However, if you can show that there was a clear business purpose, and the customer’s spouse joins you because it’s impractical to entertain the customer without the spouse, then you can deduct the cost for the spouse. This also extends to your spouse, if they join to accompany the customer’s spouse.
  • Any item that could be considered either gift or entertainment will generally be considered entertainment. However, if you give a customer packaged food or beverages that are clearly intended for later use, then that will be considered a gift, and subject to gift rules.  Gift rules are different from entertainment rules, and are covered in IRS Publication 463, Chapter 3 – Gifts.
    • For example, taking a client out for a celebratory glass of wine would be considered entertainment, but a bottle of champagne would be considered a gift.

As a real estate agent, it’s important for you to be able to keep every dollar that you can.  Tax efficiency is a very overlooked way of reducing your costs, especially on things that you might do every day.  I hope this article clarified how you can deduct entertainment expenses as a part of your business.  However, if there’s a real estate entertainment expense that you think may qualify, please post it in the comments section below.  If you have any questions or concerns, please feel free to visit my website, or email me at:

Tax Deductions for Real Estate Agents – Advertising & Marketing


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 help conceptualize what types of real-life advertising and marketing expenses can be eligible for tax deductions under federal law.  However, this is an overview, and should not be considered a substitute for sound, personalized advice from a tax professional.  Also, this primer does not provide legal advice–you need to take steps to ensure that your advertising campaigns comply with applicable federal, state, and local regulations. Continue reading Tax Deductions for Real Estate Agents – Advertising & Marketing

Amended Return: Does the IRS Owe You Money?


According to the IRS, 5 million people were expected to file amended tax returns for 2014.  Many amended returns actually result in a refund that would have been awarded if the original return had been filed correctly.  If you prepare your own taxes, changed accountants, or had a major life change (such as change in marital status, dependents, or house move), how can you really be sure that you’re not leaving money on the table if by not filing an amended return?  As a real estate agent, how confident are you that your previous year tax returns accurately reflect all the deductions you’re entitled to?  Conversely, you could be waiting for the IRS to find your mistakes and say that you owe more than your tax return indicated.

The IRS rule is that you can to file an amended return for up to 3 years after the original due date (or the file date if the due date was extended).  However, if you missed previous filing or payment deadlines, or are amending a previously amended return, there are additional restrictions that may apply.

Amended return opportunities

If you think you may want to amend a return, below are five places to start:

  1. Change in status

    This can be a move, getting married or divorced, having a baby, or any number of things that you wouldn’t have accounted for the year before.  For example, in light of the Supreme Court decision to legalize same-sex marriages has unleashed a flurry of amended returns to reflect joint filing or married filing separately status.

  2. Math Errors

    In its most recent report, the IRS reported over 2.2 million math errors for 2013 individual tax returns.  Out of approximately 147 million returns, this results in approximately 1.5% of all returns.  The IRS usually will correct math or transposition errors during the initial processing of a filed tax return by comparing the return to supporting documents.  However, it doesn’t hurt to check for errors, particularly on things that the IRS might not be able to see, such as receipts.

  3. Schedule A-Itemized Deductions

    Schedule A contains most of your itemized deductions, including charitable contributions, mortgage interest, and miscellaneous deductions.  If you recently bought or refinanced a house, or you do a lot of charitable work, it may benefit you to take a look at your Schedule A to see whether an amended return is appropriate.

  4. Schedule D-Capital Gains & Losses

    Although tax harvesting seems to be a catch phrase during the end of year, there are a lot of people who make mistakes when recording their capital gains on their tax return.  For example, a common mistake is listing the sale price for a security, but forgetting to note the basis (purchase price + commission).  Not only does this apply to securities such as stocks & mutual funds, but it applies to the sale of your principal residence.  When calculating your home’s basis, don’t forget to add the cost of major improvements, systems & renovations.  Think roof replacement, air conditioners, or kitchen remodeling.  Major projects (not repairs) will increase your basis, therefore lowering your taxable gain.  Also, real estate commissions & closing costs should be considered, as they will lower your taxable gain as well.

  5. Schedule C-Profit or Loss from Business

    Unless you have a separate tax entity for your real estate career, you’re most likely going to be using Schedule C to itemize your business-related deductions.  If you do, but you never filed a Schedule C, you should look a little further to see what you may be able to deduct as a real estate agent.

This article isn’t meant to replace competent tax advice that is tailored to your specific situation, and it definitely is not an all-inclusive list of mistakes that could be in a tax return.  However, as a real estate agent, you should be aware that doing your own taxes or sticking with a bad tax preparer could have you leaving money on the table, or worse, waiting for the IRS to find your mistakes and come after you for the difference (plus interest).  If you’re not sure what to do, you should consult with a fee-only financial planner or tax professional in your area.

3 Tax Concerns When Selling A Home

For real estate agents, this topic might seem like a no brainer.  However, your clients might not know the tax implications of their pending transaction, and this article can be used as a conversation starter with them.  Feel free to use this article to engage your clients in their critical thinking so they can make the right decision.

When a homeowner makes the decision to sell their home, it can be for any number of reasons: relocation, buying a bigger home, downsizing, or because it makes financial sense to do so.  As their real estate agent, you will be the first person your clients turn to when these questions come up.

Whatever the reason for selling a home, there are three tax considerations that warrant a further look.

Tax concern #1: Your realized gain

When selling any real estate, the IRS definition of realized gain takes into account a lot of things you may not have thought about.  According to the IRS, the basic formula for calculating your realized gain is:  Sale price – selling expenses – adjusted basis.  This means you need to calculate two things:  selling expenses & basis.  Properly calculating these two things could mean the difference of thousands of dollars in tax liability.

Selling expenses include any seller’s closing costs, real estate commissions, and any other related selling costs.  You should comb through your closing documents to make sure you’ve properly accounted for all selling expenses.  Do not include city & county property tax, but do include transfer taxes, if applicable.

Basis includes the original purchase price of your house, plus fees incurred during home closing, such as title insurance, legal & recording fees, or survey fees.  Basis also includes the cost of any major improvements, renovations, or system replacements.  The IRS makes a clear distinction between repairs that are a normal part of keeping a home in good condition (such as repairing leaks), and an improvement (such as replacing the plumbing system).

For a more comprehensive list of what can & cannot be included in selling expenses or basis calculation, you can refer to the IRS Publication 523, ‘Selling Your Home,’ which is user-friendly and available online.  Real estate agents:  Even if you’re not a tax practitioner, you probably are able to help clients figure out what constitutes selling expenses, as well as the difference between repairs and major improvements.

Tax concern #2:  Section 121

Under Section 121, the IRS allows a taxpayer to exclude the first $250,000 of capital gain ($500,000 for married couples filing jointly) on the sale of their primary residence if they meet certain ownership and use requirements.  If you owned the home for at least 24 months of the 5 years leading up to the sale, you meet the ownership requirement.  If the home was your primary residence for at least 730 days of the previous 5 years, you meet the use requirements.  If you’re married filing jointly, you must each meet the use requirement, even if only one person meets the ownership requirement to qualify for the $500,000 exclusion.  If you’re not married, but selling the house with someone else, you may each take the $250,000 exclusion as long as each of you meets the use requirement, and at least one of you meets the ownership requirement.  Even if you do not meet the requirements for a full exclusion, the IRS allows partial exclusions if you sell the home due to work or health related moves, or due to unforeseeable events such as death, divorce, natural disaster, unemployment, or other qualifying reasons.  IRS Publication 523 contains more details.  Real estate agents:  you should have this information at the ready in case someone asks about the tax implications, even if you aren’t prepared to give tax advice.

Tax concern #3: Long Term or Short Term Capital Gain?

If you owned the home for at least a year and a day, any gains are taxed at long-term capital gains rates, which range from 0% to 23.8%.  Otherwise, your gains are taxed at short-term capital gains rates, which are the same as ordinary income rates.  Long term capital gains rates calculations are based upon a taxpayer’s marginal tax bracket, but are more favorable.  For example, a taxpayer in the 15% tax bracket will pay 0% on a long-term capital gain.  If you’re considering the sale of your home at a profit within a year of purchase, you may want to consider whether you can sell it in a manner that qualifies the sale as a long-term gain.  However, if you’re selling your principal residence for a loss, you do not qualify for any type of deductible loss.  For real estate agents, this is worth discussing with your clients if you believe that timing is not on their side and they would be better off waiting.  For example, they may be trying to sell in the middle of winter, when no one likes looking at houses, or you’re trying to recommend some repairs in order to get their selling price.

This article is by no means an adequate substitution for unbiased advice, based upon the unique circumstances of your personal situation.  Before you make any major decisions, you should sit down with a fee-only financial planner in your area so that they can help you take into account all of the other factors that can affect your planning decision.  Having a relationship with a trusted professional who can help account for life’s changes is the best way for you to put together a plan that achieves your retirement goals.

Forrest Baumhover is a fee-only financial planner and the principal of Westchase Financial Planning.  To find out more about Westchase Financial Planning, go to



Five Ways for Real Estate Agents to Maximize Tax Deductions

Tax deductions
How to maximize your tax deductions

Tax liability is one of the most important considerations for real estate agents for several reasons.  First, real estate agents usually operate as sole proprietors or as part of a closely-held LLC or corporation.  That means every dollar that an agent can save is a dollar that contributes to their personal bottom line.  Also, real estate agents are usually responsible for out of pocket expenses that may directly or indirectly improve their business—many of these expenses can be tax deductible.  Finally, not knowing the tax implications of their decisions can set agents back thousands of dollars…this can mean the difference between success or failure in the early years of establishing a successful business.

Let’s look at five ways real estate agents can maximize their deductions and making their business as tax-efficient as possible.  These are not five ‘quick tips,’ but they’re rules of thumb:

  1. Tax Tip #1:  Document every expenditure. 

    When you’re working for an employer, you might be required to document your expenditures.  However, when you’re spending OPM (other people’s money), you don’t really care as much about their money because it’s not yours.  When it’s your money, you’ll want to take care of every dollar to maximize your investment.  You want to document every expenditure, whether or not it’s tax deductible, if nothing more than make sure your books are organized.  Whether you’re audited by the IRS, looking for a loan or line of credit, or simply looking to become part of a larger real estate group, taking the time to document everything & keep a clean set of books will help enhance your professional reputation.  Which leads us to Number 2.

  1. Tax Tip #2:  Treat your business like it’s a business.

    Whether this is part-time work or your full-time career, being a real estate agent is a business, whether you think so or not.  The sooner you recognize this fact, the sooner you can learn how to run your business.  Part of running an effective business is finding the most cost-effective manner to reach your goals and objectives.  This doesn’t mean cutting corners or settling for less.  It simply means clearly identifying your goals, then working to ensure you’re maximizing the efficiency of your processes to get there.  Maximizing your efficiency means maximizing your tax-efficiency as well.

  1. Tax Tip #3:  Ask yourself, “Is this deductible?” every single time.

    Just get into the mindset that every expenditure could possibly be deductible.  Perhaps not.  But you should ask this question every time you spend money on something.    Obviously, taking a trip out of town for leisure doesn’t count as a deductible expense.  However, taking a trip out of town to check on an investment property you own is related to your business and can be eligible for tax deductions, even if you happen to take some leisure time in association with that trip.  However, the difference between legal tax avoidance and an illegal attempt to evade tax liability can be very subtle, so you should become familiar with the rules before you attempt to take deductions.

  1. Tax Tip #4:  Be familiar with the rules.

    The tax code is complicated.  It’s very difficult.  It’s huge.  However, the IRS expects you to be familiar with the rules that related to your personal situation.  Just like knowing the real estate business, you should know a little bit about how taxes play into your business.  It also wouldn’t hurt to be able to help your clients better understand how taxes play into their transactions.  Section 121 (the ability for taxpayers to exclude up to $250,000 or couples to exclude up to $500,000 of their home sale gain, provided they meet certain ownership and use requirements) should not be a foreign concept to you.  Neither should terms like depreciation, basis, or Section 1250 recapture.   You don’t have to be an expert, but you should be able to answer one or two questions on widely covered topics such as these before you have to punt to a tax professional.  You can always caveat by saying something like:

“I’m not a tax professional, but Section 121 of the Internal Revenue Code does allow you to …. provided you meet certain ownership and use requirements.  However, for your particular situation, you might want to talk to an accountant or other tax professional to make sure you’re taking the right steps.”

Which brings us to the last point:

  1. Tax Tip #5:  Hire an accountant or enrolled agent today.

    Would you rather spend your time and effort being the best real estate agent you can, or would you rather save a few hundred dollars and do your own taxes. Perhaps you can’t afford that few hundred dollars in the first year or two.  Here are a couple of reasons why that might be a very sound investment:

  • You might be saving a few hundred dollars and missing out on tax deductions or credits that could be worth much more.  There is an entire industry dedicated to helping people prepare their tax returns, and another industry dedicated to helping people and companies become more tax efficient.   Let these folks take the work off your hands, and so that you can run your business more efficiency.  If they find that missed deduction and save you a bunch of money, you’ve already recouped that investment.
  • You learn. Knowing more about taxes and how they can impact you will help you build a better business.
  • When you see a client whom you know needs tax help, it’s a lot easier to refer that person to a tax professional you’ve already hired.  Being able to say, “Let me introduce you to my accountant” is just another way to add value to those clients, in the same way you’d refer them to a contractor, mortgage broker, or any number of professionals you’re constantly referring clients to.

In future articles, I’ll go into more detail about expenses and their deductibility.  However, implementing these five steps is the best way for you to quickly develop your business as a real estate agent in the most tax-efficient manner.

As always, please feel free to follow this blog or contact me at:, if you like this blog, have concerns or questions, or have a topic that you would like for me to address.  Until next time, take charge of your life!