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Basic Tax Information for Real Estate Professionals

Discussion Talking points:

  • Rule of Thumb

  • Common Expenses in RE

  • Entity Selection

  • Homeowner Gain Exclusion

Rule of Thumb for Self-Employed Real Estate Professionals

For many newly licensed real estate agents, being self-employed means forming new habits when it comes to spending and tracking expenses. Most people in the U.S. file their taxes as an employee of a business, which means taxes are automatically deducted from their paychecks, and at the end of the year, filing your taxes is fairly straightforward.

Shift into filing taxes as a self-employed person, and the game has changed. The “Rule of Thumb” or 101 is to separate personal from biz transactions. Open a separate bank account for your business expenses. Utilize your business account to catch any spending from the biz acct. Let the bank do your accounting for you. If you create the habit of separating accounts, as biz grows, bookkeeping software such as QuickBooks is good practice for tracking financials.

  • Separate business and personal transactions

  • Separate bank accounts

  • Utilize the business account to catch all business transactions. (deposit commissions and use for expenses)

  • Creates a habit to separate financial accounts, so that when you introduce a bookkeeping software it pulls relevant information from the bank

  • Creates a clean audit trail

  • Catches the small expenses that otherwise may be missed

Common Expenses for Self-Employed Real Estate Professionals

When thinking about your common expenses for your real estate business, basically, anything that pertains to your business can be written as an expense against your taxable income.

Some common expenses:

  • Vehicle Expenses (Either mileage or actual expenses, but not both)

  • Home Office Expenses (Direct or Indirect)

  • Client Costs (Expenses paid by Real Estate Agent for the Client)

  • Internet fees and costs

  • Office supplies

  • Meals

  • Gifts

  • Advertising

  • Retirement - IRA, SEP, or other

Earned Income: Three Types to Consider

As your business grows from a small real estate self-employed business, you then may want to consider selecting a different type of entity to report your income to the federal and state governments. The reason for this is to benefit your wallet, so here are three types of business entities that you may want to consider. As your annual income grows, consider claiming your business as either an S-Corporation or C-Corporation. (a Partnership involves two or more individuals in business together, not discussed here) Here is the breakdown of some key differences:

1. Shared Overhead Costs (both entities will have these costs to maintain):

  • Separate Tax Return

  • Owner’s paid via salary (w2) - will require a payroll infrastructure

2. S-Corp Entity Selection

  • A ‘Pass Through’ Entity - all income taxes paid via the personal tax return

  • The owner must pay reasonable compensation as a salary (W2)

  • Allows for distributions of previously taxed income.

3. C-Corp Entity Selection

  • The option of a Fiscal Year-end. (does not have to be a December Year End)

  • Owner must pay compensation as a salary (W2)

  • DOES NOT have the option of Distribution of previously taxed income

  • The owner is a qualifying employee

  • Flat Corporate Income Tax Rate - Corporation pays its own tax. (not a pass-through entity)

Homeowner Gain Exclusion

If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income for single filers, or up to $500,000 of that gain if you file a joint return with your spouse.

If you have more questions or concerns for your particular situation as a Real Estate Professional, please contact John Michael Kledis, EA, CFE, CVA at Peridot Consulting Inc.

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