- June 8, 2020
- Posted by: Gunveen Bachher
- Category: U.S. Taxes and Real Estate
Most real estate professionals are sole proprietors. This means that they are not someone’s employee, they have not formed a partnership with anyone, and they have not incorporated their business. They could work using their Social Security Number (SSN) or can also apply for an Employer Identification Number (EIN) with the IRS. The article covers the five most common business deductions that real estate entrepreneurs can take such as home office, vehicle mileage, retirement plan contributions, office expenses and startup costs. These tax deductions for real estate entrepreneurs can help them reduce big time on their tax liability while at the same time aid in tax planning too.
Federal plus State Income Taxes
Americans pay two levels of income taxes: both at the Federal level and at the State level. This blog post focusses more on federal income taxes since those apply to all real estate professionals and entrepreneurs nationwide. But it is important to know that additional state taxes (over and above the federal taxes covered in this blog post) are required to be paid as well.
States with NO state income tax
If you live in one of these states, you do not have to pay any state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
States with limited state income tax
Residents of New Hampshire and Tennessee do not have to pay any state income tax on income made in your line of work(e.g.in the form of wages or self-employed income) but they do charge state income tax on income earned from investments such as interest and dividends.
States who levy full state income taxes
If you do not live in one of the nine states above, you are required to file and pay state income taxes on top of your federal income taxes.
Tax Deductions for Real Estate Agents
The IRS gives a long list of business expenses (there are tons of them) that are allowed as deductions. Business expenses are tax write-offs, and as an independent contractor, you will have a lot of business expenses to write off.
To qualify as a deductible business expense, the expense must be:
- Ordinary and necessary for the business
- Not extravagant and
- Primarily for the business (not personal)
Following is a list of the 5 most common tax deductions for real estate:
- The Home Office Deduction or Office Rent:If the primary place of business is your home office, is a separately identifiable space in your home and that area of your home is used regularly and exclusively for work, you can deduct the cost of maintaining your home office. You can choose between the (a) The Safe Harbor Rule for home office deduction of $5 per square foot (up to 300 square feet), the cost of your mortgage, depreciation and utilities allocated to that square footage, OR (b) use the number of rooms method( example 1 room out of a 4 bedroom house is used as an office) OR (c) use the square footage method( divide the number of square feet used by your home office by the total square footage of the whole house/condo/apartment etc.). If you rent an office instead of working from home, your rent cost is deductible. If you qualify for the home office deduction, calculate your deduction on IRS form 8829, Expenses for Business Use of Your Home.
- The Vehicle Deduction: The cost of using your vehicle is a deductible business expense. You can either track your work-related mileage to use the standard mileage method @ 54.5 cents per mile, OR you can track the actual cost of gas, maintenance and insurance and multiply that total by the percentage of the time the vehicle is used for business (as opposed to personal use). You need to maintain a vehicle log in case of an audit.
- Retirement Plan Contributions:Contributions are tax deductible from current income, thus reducing present income taxes. Contributions though must be made from earned and active income and not from investment, inherited or passive income such as rental income. Plan participants contributing $5,000 to $8,000 a year can build up $150,000 to $400,000 over a ten- to-20year period, depending on how plan investments perform. A retirement plan contribution is the only tax reduction planning tool that can be used even after the year has passed.
- Office Supplies and Equipment (Including Technology):All office supplies are deductible. Paper clips, brooms, coffee, snacks, desk chair, pens, paper, work computer, work phone, real estate software, printer, scanner, fax machine, office carpeting and much more are a 100% deductible.
- Costs of Going into Business (Start Up Costs):Startup costs are deductible. Rule # 1 says that you can deduct up to $5,000 of your startup costs in the first year of business. Anything over $5,000 must be amortized or deducted over the next 15 years. Rule # 2 says that you can amortize your startup costs and pro rata over 15 years. Finally, Rule # 3 says that you do not have to deduct any startup costs, instead recover these expenses when you sell the business or close-down operations. This means that R&D costs, website designer, Facebook ads, mailers, billboards, all professional services fee such as legal and accounting (including tax preparation) fees are deductible, your blog writer. Your E&O insurance is also deductible, as is real estate coaching, ongoing real estate education, industry conferences, membership dues, and subscriptions to industry publications.
There are dozens of other deductions that real estate professionals and entrepreneurs can avail of- such as organizational expenses, costs of not going into business, meals and entertainment costs, travel and lodging costs, gifts to clients and customers, health insurance costs, education expenses and the list goes on. A good Tax Consultant should be able to work with you on not just deductions but also solicit you on some great real estate credits that you can probably avail of as well.
GavTax Advisory Services accepts clients from all 50 States including the State of New York, California, Texas, Illinois, Florida, Pennsylvania, Ohio, New Jersey, Virginia, North Carolina, and all U.S territories as well.