UPDATED for the Trump/GOP Tax Law in January 2019!
So you've got your real estate agents license and that first commission is finally on the way. No way around it now, you have taxable income. The question is, how much? And, how do you pay as little as possible? This post assumes that you will be paid on a 1099-MISC, as a self-employed Real Estate Agent. If you're getting a W-2, some of this will be useful, but not all. I'm also assuming that you work for a real estate company, and aren't completely independent. Much of this advice isn't gospel, it's just what I've seen and think works best. In some ways, it's a list of "best practices." As always, you should use this post as a starting point, and seek professional assistance when it comes to your personal situation. I am also going to assume you have not formed a complex business entity such as an S Corporation or Multi-Member Limited Liability Corporation. There are benefits and disadvantages to these, but you need to talk to a professional to understand them.
Here's a bit of something you might not want to hear, but it's actually good news. Here we go: The goal of being a real estate agent is to make tax time SUCK. If you are doing this thing right, you will owe a lot of money, every year, and the amount will go up, every year. The reason is that you are making more money. It's easy to pay no taxes if you are a crappy agent who can't make money. The goal is to make a CRAP-TON of money and pay a CRAP-TON of taxes. The key is to make sure you are prepared for the taxes you owe, and to keep the amount to the minimum legally allowed. I tell my clients that if they are doing things right they should hate me.
Gifts and Referral Rewards: Gifts to clients are generally limited to $25 per person, per year. (That’s the deductible amount, you can give more.) Be careful of referral fees. You should have received more training on this than me to get your license, but I will simply remind you that there are varying rules from state to state, as well as RESPA requirements that restrict what amounts, how and to whom you may pay a referral fee, so, check with your senior brokers before paying these. If the referral fees are legal, there are ways to deduct them, but talk to your tax professional about them.
A great gift for buyers would be a copy of my tax book. It's based on life events and has chapters like, I'm Getting Married, I'm Having a Child and, wait for it...I'm Buying a House! Please consider buying a ton and giving them to your new homeowners - they'll thank you!
You could deduct this book - which will also help you make more money in your business:
Now let's cover some more details:
The "Pass-Through" deduction: Your business almost certainly qualifies for this deduction, even if it is a sole-proprietorship and not a fancy S-Corp or LLC. This means you can generally deduct 20% of the profits from your business off of taxable income (but the ~15% self employment tax would still apply). If the taxable income (income after all deductions except this one) is less than (2018 numbers - these go up every year) $157,500 or $315,000 if you are Married Filing Jointly (MFJ), then that's all there is. If you are above that, you are subject to two limitations, one, because you are a service oriented business (you make money based on your knowledge) the deduction phases out over the next $50,000 of income increase ($100,000 if MFJ). The other limits your deductions based on wages you pay (even to yourself) and things you are depreciating. This is a complicated topic, so see a pro if your situation is complicated. I suspect most software will handle it nicely if you are below the income thresholds discussed above. As you make more money and start approaching the income limits discussed above, it's imperative that you start seeking advice from a competent EA (Enrolled Agent) or CPA and prepare for the incredible complexities of being a high income real estate agent. There are a lot of things you can do to mitigate taxes at these levels and you WILL need help with them.
If you are an experienced Real Estate Agent, help make this better by emailing me with any best practices you use, or anything I might have missed. Feel free to leave a tip if this helps you save a bunch of money on your taxes!
Don't rush off! I have a lot of other cool posts:
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