Tax Tips For Real Estate Agents Who Work Part-Time Or As A Side Business

If you work as a real estate agent on a part-time basis or as a side business in addition to your regular job, you may have some unique tax considerations. While the income you earn from real estate sales is taxable, there are legal deductions and strategies you can use to reduce your tax liability. Here are some key tax tips for part-time or side-business real estate agents:

Track Your Business Expenses

As a real estate agent, you can deduct ordinary and necessary business expenses from your real estate income. This includes expenses like mileage for showing properties, advertising, licenses, membership dues, training costs, phone and internet expenses and more. Be sure to keep careful records and receipts for all business-related expenses. Tracking expenses not only helps support potential deductions, but also gives you insights into the profitability of your real estate activities.

Deduct Mileage and Transportation

If you use your personal car for business travel to show properties, attend training or for other real estate agent activities, make sure to track your mileage. In 2023, the standard mileage rate for business use of a personal vehicle is 62.5 cents per mile. This is a significant deduction that can help lower your taxable income. Keep a mileage log with details of business trips to document this.

Take Advantage of the Home Office Deduction

If you have a home office space you use regularly and exclusively for your real estate work, you may be able to take the home office deduction on your taxes. This allows you to deduct a portion of your home expenses like rent, utilities, repairs, insurance and depreciation. There are specific IRS rules to qualify, but this can be a valuable deduction for agents working from home.

Write Off Some Housing Costs

Real estate professionals who work at least 750 hours per year in real estate sales or property management may qualify to deduct some housing expenses from their active real estate income. Qualified housing expenses include property taxes, mortgage interest, insurances and some utilities. This deduction is subject to limitations, but can still yield meaningful tax savings.

Utilize a SEP IRA

As a self-employed real estate agent, look into setting up a SEP IRA retirement account. This allows you to contribute up to 20% of your net earnings from self-employment, up to $61,000 for 2023, to the SEP IRA account on a pre-tax basis. Doing so reduces your current taxable income while building retirement funds in a tax-advantaged account. If you would like to open a SEP IRA account you can do so here. I would highly recommend discussing your decision with a tax professional before opening any retirement accounts.

Expense Cell Phone Costs

If you use your personal cell phone for business as a real estate agent, consider writing off a portion of your cell phone bill as a business expense. The IRS allows for the business use percentage of cell phone expenses to be deducted. Keep a record of how often you use your phone for real estate work calls or activities.

Claim First-Year Depreciation on Assets

If you purchase any equipment, computers, furniture, vehicles or other assets to use in your real estate business, make sure to claim first-year depreciation. Section 179 depreciation allows you to deduct the full purchase price of qualifying equipment in the first year it is placed in service up to annual limits. This maximizes deductions for your first year in business.

Deduct Professional Fees

Things like accounting fees, legal fees, consulting costs, photographer fees and more that you pay out as a real estate agent count as deductible professional fees. Try to pay these fees separately from your personal accounts for easier tracking.

Leverage Real Estate Losses

If your real estate activities operate at a loss during the tax year, this loss can be used to offset other income like wages from your regular job. There are limits, but passive real estate losses can lower your tax bill on earned income. However, beware the IRS hobby loss rules if your real estate activities show losses year-after-year.

Consider Incorporating

For full-time real estate agents, forming a corporation or LLC can provide taxation benefits like lower corporate rates and deducting the full cost of health insurance. For part-timers earning side income, the added costs may not justify incorporating. But review the pros and cons.

Hire a Tax Professional

With real estate taxes, it can pay off to have a qualified tax preparer who understands real estate rules and deductions. A few hundred dollars in accounting fees can yield significant tax savings and ensure you comply with IRS rules. Keep all your expense documentation organized for your preparer.

The tax rules for real estate agents who work part-time or as a side business can be complex. But taking advantage of all the available deductions, following IRS record-keeping and rules, and working with a tax pro can help maximize your tax savings. Proper planning will also give you a better picture of the true profitability of your real estate activities. With some diligence, you can reduce taxes on your real estate income.

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