It’s Tax Season: Tax Preparation for Real Estate Agents
The holiday bliss is just beginning. We hate to burst that happy bubble, but tax season is upon us too. Here are some ways that real estate agents can easily and (fairly) painlessly prepare for tax season.
If you haven’t done so already, start tracking items that can be deducted. The best thing to do is keep track of all your expenses as you accumulate them. But if you haven’t, don’t worry! It’s never too late to start tackling expenses. You can also use this advice and get a jump start on tracking expenses in 2018.
Here’s an idea of just some of the business expenses you can be tracking:
- Mileage on company vehicles
- Shipping, handling and postage materials
- Food and drink consumed during business meetings
- Additional transportation expenses – like flights, gas, etc
- Printing costs, printer ink and other office supplies
- Office space, warehouses or storage units
Keep a notebook in your car to write down expenses you incur on-the-go. Use your cell phone to take pictures of important receipts; it is a great way to store them for future use when you go to do your tax preparation.
Along with these analog tools, here’s a few handy smartphone apps you can use:
- Dollarbird Free cross-platform finance app that was endorsed by Forbes.
- Expense Manager A free budgeting tool available on the Google Play Store.
- XpenseTracker – Expense Tracker & Mileage Log Available on iOs via the App Store. Works on your computer and phone.
Since you are a self-employed real estate agent, you can deduct any necessary business expense needed to make a profit.
- Mileage: Real estate agents certainly rack up the miles. Since you probably use the same car for both personal and business use, you need to track your business mileage separately. Any miles you drive to stage properties, show properties or go to meetings is fair game. For 2017, the standard deduction is 53.5 cents per mile.
- Advertising: You can deduct any advertising cost—business cards, flyers, newsletters, e-news, newspaper and magazine ads—and any other form of advertising. Thankfully, the IRS views advertising as a necessary business expense for real estate agents.
- Professional Fees: Yes, you can deduct your professional and licensing fees that pertain to your real estate business. For example, you can deduct your National Association of Realtors fees or any other professional organization, as well as your agent licensing and practice fees, such as the renewal cost per year of your real estate license. You can deduct accountant or tax preparation fees—but only if you use an itemized return. If you take courses to study for your real estate exam or to prepare for renewal, that is tax deductible as well only if these classes are required by law for you to obtain or keep your license. You just have to provide proof that the classes are legally required, as well as proof of completion, such as a certificate of completion or receipt.
- Home Office Expenses: Many real estate agents work partially or fully from a home office, and the portion of your home dedicated for that purpose is tax deductible. In fact, you can deduct that portion of your utilities, homeowner insurance and even mortgage interest. The expenses must reflect the portion of your home that is an office. Let’s say you have a 3,000 square foot home, and 300 square feet is your office. That means you can deduct 10% of these items. You can deduct other expenses as well, including the portion of printer ink and paper you use for business, as well as a second phone line dedicated for real estate business. You can even deduct desk fees from your brokerage and any other legitimate and necessary business equipment expense.
The reasons why the IRS may audit you can vary. Individuals that are self-employed are much more likely to be audited by the IRS. This includes individual agents and people who run their own agency. If you’ve accidentally made an error in your math, and the IRS catches it, you’re likely to get audited. The most common cause for an audit is from unreported income. You may also get audited if you have a complicated deductions filing with a lot of business expenses, or if you’re claiming a lot of charity donations.
Even if you’ve never been audited, you should prepare each year for one. Being prepared means ensuring you’ve reported all income that was reported to you, and having all the receipts for items you have put on your return. You need to have all your financial records in order and ready for review by the IRS. Be prepared for heavy scrutiny. Get ready for your audit by familiarizing yourself with the full process. Retain the help of a professional. They know this space and can help you get through this minimally scathed.
IRS Schedule for Large Items
If you are claiming very large expenses on your return, make sure you use the IRS schedule for large items. Many of these items can be reported on the Schedule E Form 1040. This form allows you to make clarifying detailed statements to explain large items to the IRS. It covers both supplemental income gains and losses made by an individual.
Some “large items” commonly declared on the Schedule E Form 1040 are media expenses, royalties, loss or gain from real estate, trusts, bonuses and dividends paid and much more. Consult this form and you’ll see what’s covered or if you need to file an additional schedule form. For a full look at the forms you may need to file, for large items and more, visit this page on the IRS website.
Health Care Costs
These costs can be deducted if you do not obtain health insurance on a spouse’s policy and if your broker does not provide you a plan. If you obtain insurance on your own, your premium should be tax-deductible. Also, as a real estate agent, you can deduct contributions to health savings accounts (HSA) and medical expenses.
Track Your Tax Return
When you actually file your tax return, pay the little bit extra for delivery confirmation and tracking number so you know where your return is at all times. If you file online, the IRS has a tracking system whereby you can see your status at all times. Either way, tracking helps you in the event that you ever have to prove that you really did send in your tax return.
Ready Or Not, Here We File!
Filing for taxes is often a daunting and loveless task. It may cause a lot of late nights or long days spent at the computer. Though it doesn’t have to be! Create a system for yourself that allows you to track expenses on a weekly or monthly basis. If you have an office assistant or a VA (virtual assistant), they can help you create an Excel file or other document to itemize all your expenses—making it easier during the filing process.
If the thought of filling out your tax forms brings on pain, anxiety or any other form of grief—don’t sweat it! You might want to consider finding a reliable and trustworthy tax account with experience working with realtors to help you navigate the system easily and appropriately. Do your homework, shop around and ask colleagues how they manage their taxes. As a realtor, you have a lot of priorities and responsibilities. Maybe having someone else file for you is the best decision to help keep you focused on the year ahead. Happy filing!