Many people envy the lifestyle of the self-employed. You set your own hours, you don’t have a traditional boss to whom you are accountable, and in theory, you have unlimited earning potential. The main downside to all of this freedom is your increased tax burden – both paying them and preparing your returns.
Many self-employed real estate professionals must make quarterly tax payments or risk IRS penalties and fees. You’re also required to pay the portion of Medicare and Social Security typically covered by an employer. Because of this greater financial burden, you need to take full advantage of all the tax deductions to which you are entitled.
While tax rules for self-employed persons can be complex, you can generally write-off expenses that fall into two categories:
- Expenses incurred exclusively as a result of operating your business
- Financial losses incurred as a result of operating your business
Here are six common tax-deductible expenses every self-employed real estate professional should know about:
The most commonly claimed tax deduction for self-employed workers are the expenses associated with operating your private vehicle for business purposes. The cost of all business-related driving, with the exception of commuting to and from your office if you work outside your home, is tax deductible. If you’re good at keeping detailed records, you can carefully track all your car expenses to figure out your annual deduction. But, if you’d rather not keep track of how much you spend on gas, oil changes, repairs, tolls, and car washes, you can use the standard mileage rate deduction established each year by the IRS. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car.
Many real estate professionals work out of their homes. As such, the IRS allows you to deduct a portion of your mortgage or rent based on the square footage of your home office as a percentage of the total square footage of your home. To qualify for this deduction, you must have a specific area in your home designated for work and you must refrain from using it for other purposes. For example, a third bedroom used exclusively as your home office counts, whereas the kitchen table does not.
Self-employed professionals who claim a home office deduction can also deduct a portion of their utility costs. To determine how much of your utility costs are tax-deductible, calculate the percentage of your home occupied by the office. Along with gas and electricity, you can deduct the costs of heating, air conditioning, and phone service.
As is true for any professional, it’s important for self-employed persons to continually expand their skill-set and learn new things. To that end, many pay for themselves to attend classes, educational seminars, trade shows, and other training events.
The IRS allows self-employed workers to deduct all expenses related to professional development – including tuition and fees, supplies, travel, and lodging — on your tax returns. In addition, you can write off dues for professional organizations and membership fees.
Advertising and marketing
In an increasingly competitive housing market, you must aggressively market your services to attract new clients and grow your income. The IRS permits real estate professionals to write-off the cost of flyers, digital advertising, business cards, and print ads among other marketing expenses.
Any insurance you buy just for your real estate business is tax-deductible—for example, General Liability & Property Insurance and Professional Liability (also know as Errors & Omissions Insurance). If you claim a home office deduction, you may also deduct a portion of your home-owners insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes.
Due to the unpredictable timing of real estate contract closings and the high interest rates that can be associated with credit cards, real estate professionals often draw upon a commission advance to fund their business during cash-flow lulls. The IRS allows agents to deduct the cost associated with a commission advance when the advance funds are utilized to pay for general business expenses like those mentioned above. This applies to using commission advances to pay for annual business taxes as well, a common practice for real estate professionals. You can read more about using commission advances for taxes here.
Tax issues are complex. As such, it’s advisable to always consult a tax professional prior to filing your taxes.