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:
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.
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.
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.
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.
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.
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:
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.
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.
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.
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:
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: firstname.lastname@example.org, 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!