Tax season is right around the corner, and it's time to start thinking about how you can save some money. One of the best ways that real estate agents can reduce their tax burden is by claiming deductions on their taxes for all of those expenses they incur during the course of business.
This guide will look at 20 of the most common real estate agents deductions that you can start claiming today.
But before we delve into that, here's a quick overview of what tax deductions are.
Tax deductions are expenses that you incur throughout the course of your business, and can be subtracted from your total annual income before calculating how much tax you owe the IRS.
Note that it's illegal to claim a deduction for personal expenses -- so don't try to pass off your daily Starbucks habit as an expense incurred while doing work-related tasks.
However, it's perfectly fine to claim any expenses that you incur for your business, including office supplies and utilities.
In fact, there are several ways real estate agents can reduce their tax burden by claiming these deductions every year--as long as they follow the rules.
Note: if you want an automatic way to claim these real estate agent tax deductions, try Bonsai Tax. Our real estate agent tax software will scan your bank/credit card receipts to discover potential write-offs, estimate your taxes, and send you filing reminders. In fact, our app typically saves users $5,600 from their tax bill. Claim your 14-day free trial here.
You'll need to keep detailed records of these write-offs as proof in case you get audited by the IRS. Here are the business expenses you can write off as a real estate agent for more tax savings. To discover how to lower your tax bill even more, be sure to read about other tax hacks for freelancers.
If you use your car for business purposes, then every mile that you drive can be written off as a tax deduction.
If you drive your own vehicle to meet with clients, track the number of miles that you drove and deduct this on your tax return. If you use a company car, don't worry - the mileage will already be tracked for you.
You can claim a vehicle tax deduction using two methods:
Standard mileage deduction involves you taking a cost per mileage driven for business purposes. For the tax year 2023, the standard mileage rate for use of a car (also vans, pickups, or panel trucks) is 62.5 cents per mile driven. This covers expenses incurred during business usage of your vehicle including gas, car loan interests, registration costs, parking fees, and repairs.
So, if you drove 1,000 miles over the course of the year to meet potential clients, you can write off $625 from your tax bill.
Itemized deduction is more complex and involves you itemizing the expenses you’ve incurred throughout the year for maintaining and servicing your car. You can track your miles with our online mileage tracker template.
Real estate agents need to have insurance in place before they start operating -- and any premiums paid throughout the year can be written off on their taxes.
Keep records of all insurance premiums related to real estate sales or listings. Some of the coverages you can write off include:
Legal costs associated with business dealings are 100% tax-deductible -- including consultations and court fees related to buying and selling property.
For example, an attorney may be necessary when buying a new home because you are not familiar with all aspects of the transaction. Maybe you are starting an LLC/ setting up your business structure and incurring some business start-up costs. Or perhaps someone is suing you over non-payment in real estate transactions - this will certainly incur some legal costs.
The Internal Revenue Service allows deductions for business use of part of your home if you meet certain criteria, including that the space is used regularly and exclusively for work. You can deduct expenses related to the business use of this area as well as depreciation on its value as a home office reimbursement.
In addition to your home office deduction, you can deduct a variety of equipment.
These include computers and related software; cellular phones or pagers used in the business; fax machines and answering devices for work-related use at home; depreciation on furniture, fixtures, and appliances purchased for an agent's place of business – but only if the agent uses them more than 50% of the time for their real estate business.
There are several ways to market as a real estate agent and all of those costs can be used as tax deductions. All you need is to keep track of your expenses throughout the year so that you have them ready for when it's time to file taxes.
As a real estate agent, you’ll often incur these costs when advertising your business:
As a 1099 consultant, any fees associated with attending conferences, seminars, or trade shows can be claimed as a tax deduction for real estate agents--so long as they are directly related to your business and improve upon your skillset.
These can be deducted in full or prorated based on how much they were used during the year. For example, if you join an association that costs $300 a month but only attend one of their seminars this year, then your deduction would be limited to 25% of the cost ($75).
To get the full deduction, real estate agents should keep receipts and records of how much they paid for each association membership.
Note: If you are looking for an automatic way to record all of your real estate deductions, try our tax software, Bonsai Tax. Our app can help you easily track and record all of your tax receipts for the IRS. It would be stored online for easy access so it doesn't matter how long you need to keep receipts in case of an audit. Typically, users save $5,600 with our app. Try a 14-day free trial today.
Real estate agents can deduct the cost of education and training required for their job. The costs associated with these courses, such as textbooks and study guides, are also deductible.
To deduct these expenses, however, the IRS requires you to meet a few requirements:
Some other tax deductions for real estate agents include fees to license boards such as state broker commissions or registration fees with local municipalities.
These can be deducted in full provided you have a receipt proving their cost. Property management fee costs are also deductible if you pay them from your own pocket instead of charging tenants directly on top of rent payments (in which case no deduction is allowed).
Real estate agents are able to write off a portion of their monthly cell phone bill. The deduction is based on the number of calls made for business purposes, which you can track through your records.
And if you buy a new phone to conduct business, you can write off the cost of this phone too.
If your work requires you to travel out of town, this means that any expenses incurred can be claimed as a business travel tax deduction.
Travel expenses are deducted in the following order:
Most business trips fall under this category including driving a car or using public transportation to get around town for appointments with clients.
If you use a private vehicle, then fuel charges can be deducted as well when filing taxes next year.
Realize, though, that there are direct costs and indirect costs.
Direct costs are those associated with the actual trip itself such as airfare or gas for your car. On the other hand, indirect costs include general items that relate only remotely to the purpose of the trip like business meals and entertainment.
The costs of meals and drinks while traveling on business are deductible if they meet the criteria for a meal in a clear business setting. We recommend you use an expense tracker for travel that automatically discovers and records your deductions.
If you go out for lunch or dinner with potential clients, any meals can be claimed as tax-deductible. However, you can only claim 50% of your meal.
If you go out for lunch or dinner with existing clients and/or associates who aren't potential leads, these expenses are considered entertainment and cannot be claimed as tax-deductible.
When real estate agents sell a home, they may have to pay the seller commissions. These commissions are paid by the home seller and are typically divided up between both the buyer's agent and the selling agent, according to whatever is agreed upon before the sale of the home occurs.
When these commissions are paid by either of these two parties, then this expense may be deducted..
The health insurance deduction is available to any self-employed individual. Because real estate agents are considered self-employed, this means that they may be able to deduct the premiums paid on their own private health insurance policies.
This deduction can cover payments made for both their spouses and children. The only stipulation when it comes to qualifying for this type of deduction is that you should not be eligible to participate in a health insurance plan maintained by your employer or your spouse's employer
Real estate agents may also be able to deduct dues and fees paid to associations or organizations. These deductible business expenses can include things such as:
Real estate agents have to pay for all kinds of expenses to run their businesses, one example being software. In terms of taxes, if this software is used only for the purpose of real estate activities, then it may be deductible.
This means that if you use any accounting software to help manage your books, then it might be deductible. A tracking app for receipts would fall under this category and be deductible.
Real estate agents may also be able to deduct any desk fees that may have been paid. Desk fees can also include the monthly charges for renting a desk from an office supply company.
Receiving therapy or mental health treatment may also be deductible for self-employed individuals or individuals who work from home. These expenses can include things such as:
Real estate agents who also own rental property may be able to deduct any revenue losses they incurred during the tax year. These can include things like:
You can write off all the gifts you gave to your clients throughout the year--but there's a limit! You can only claim the price of gifts up to $25 per person, but you may be able to write off more if your clients were under obligation (i.e., wedding gift for a daughter).
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?