As the realization that taxes are due in 10 weeks sets in, most real estate agents are desperately trying to find every deduction and loophole to help minimize their tax obligation.
Being blindsided by a huge tax bill is not something most of us look forward to, but I’m sure you’ve experienced a tax scare at least once in your career.
Fortunately, here are two straightforward actions agents can take to help reduce any additional tax payments at the end of the year and make tax season less daunting.
First, leverage key write-offs
Most agents know that write-offs — or tax deductions — reduce your taxable income, and therefore, your tax bill.
By tracking every expense in a spreadsheet or financial tracking app, you can calculate how much money you are able to deduct to lower your tax rate and keep more profit.
There are potentially hundreds of tax deductions available to real estate agents, but some of the lesser-known deductions that you can take advantage of are Section 179, state and local taxes, and commissions paid.
Section 179
Section 179 allows businesses that purchase qualifying property during the year to fully write off the purchase price rather than depreciate over time.
Congress has set the Section 179 limit for 2017 at $500,000. This means you can fully deduct qualifying purchases in the year of purchase up to $500,000.
What qualifies as Section 179 property? Business equipment, computers, office furniture, publicly available software and vehicles over 6,000 pounds.
The value? The Section 179 deduction makes investing in new equipment more attractive because it reduces the effective purchase price of big-ticket items like computers and furniture.
State and local taxes
State and local taxes are generally imposed in the jurisdiction you do business in.
The state and local taxes your small business pays are generally fully deductible on your federal tax return. Note that you can never deduct federal income tax as a business expense.
Commissions
Commissions you pay to employees or third parties for your small business are fully deductible expenses.
Only the net commissions you earn are taxable income — make sure you deduct anything additional!
Second, set aside income in advance
As a general rule, set aside 30 percent of your income (before expenses) during the year for taxes. Your effective tax rate will most likely be less than that, but it’s always better to be conservative.
But don’t wait until the end of the year to pay your taxes. You may not know this, but the IRS requires you to pay estimated quarterly taxes if you expect to owe more than $1,000 in federal taxes throughout the year.
Independent real estate agents can also use a free online tax calculator to get a sense of your actual numbers rather than just rolling the dice on what your tax bill might be.
Where to learn more about agent taxes
The IRS has a wealth of tax-related information on their website.
Check out the IRS’s Self-Employed Individuals Tax Center for more information. For another free resource on the most common real estate deductions written in plain English, go to 99Deductions.com.
Aaron Lesher, CPA, is part of the Customer Success and Growth team at Hurdlr, the developer of ProfitDash, in Washington, D.C. Aaron also helped create a free tax resource for self-employed entrepreneurs called 99Deductions. Follow Aaron on Twitter or connect with him on LinkedIn.
