Are you ready to get the upper hand when it comes to your taxes? There are plenty of opportunities for legit write offs if you know where to look. (By the way, if the subject of tax deductions sounds at all boring or intimidating, read more to see why this could be the most exciting and profitable read this week!) 

We’ve put together our best “crash course in tax deductions,” including a list of top write offs for Realtors® and resources for helping you track your expenses. With a little time and planning, you’ll be amazed what a difference it can make come tax time!

Friendly reminder: your income taxes are serious business and we are not tax experts. Please consult with your tax professional before making any tax-related decisions.

Spending money on your business might not always seem like fun, but discovering legitimate tax write offs along the way makes investing in your business much more meaningful.

Why Are Tax Deductions Important?

Tax deductions reduce your taxable income. Rather than be taxed on your gross receipts, your business is generally taxed on your net income — the portion of income that is remaining after your business-related expenses are considered. For example, let’s say you earned $75,000 last year and you can substantiate $20,000 in deductions. You will only be taxed on $55,000.

The IRS is not obligated to honor any tax deductions if they are not substantiated, though — even if the IRS agrees that an expense is legitimate. So, it’s a good idea to keep your receipts! Apps like Expensify, Zoho Expense, and Evernote make it easy to keep and file digital copies of receipts.

Code 162(a): Your New Buddy

Spending money on your business might not always seem like fun, but discovering legitimate tax write offs along the way makes investing in your business a much more purposeful endeavor. It can also remove some of the psychological burden, knowing that you’ll be able to write off a lot of your expenses and reduce your taxable income. But you need to start thinking about your tax strategy at the BEGINNING of the year and keeping a paper trail, even if it’s digital, so you and your tax professional can choose the deductions that will make the most sense for you.

There are only a few guidelines to remember, neatly contained in IR Code 162(a). It isn’t rocket science, but it is Internal Revenue Service code, so dare we say it’s designed to confuse you.

IR Code 162(a) states that, with a few exceptions, any expense for your business should be a write off if it is:

• ordinary and necessary (appropriate and helpful in the development of the business)
• directly related to your business
• incurred or paid during the taxable year
• while carrying on a trade or business
• reasonable in amount

Let’s break this down with an example.

Bob Broker’s Skywriting Campaign

Bob Broker feels it’s important to go to extreme lengths to advertise. Let’s say Bob buys an airplane and keeps a pilot on call at $250/hour to do sky writing with his business logo in the sunny skies above his hometown of 5,000 people whenever the weather is nice.

Sounds crazy, right? Let’s go through the check list and find out how this situation scores.

  • Is it ordinary and necessary (appropriate and helpful in the development of the business)? It’s hardly ordinary. And while the skywriting advertising could be helpful, it might not be appropriate to this type of business or for the target market.
  • Is the advertising message directly related to Bob’s business? Yes.
  • Were the expenses incurred or paid during the taxable year? Yes, the skywriting took place during the taxable year. We’ll assume the airplane was purchased during the taxable year, too. Depending on the cost, the airplane itself may be considered a capital expenditure and would need to be amortized – if it would even qualify as a legitimate business expense at all.
  • Was the expense incurred in the course of carrying on a trade or business? Yes. The business existed during the tax year.
  • Is it reasonable in amount? Well, since “reasonable” is subjective, and IR Code 162(a) puts no cap on a “reasonable amount,” let’s change the last checklist point to…
  • Could this same task of advertising to 5,000 local people be carried out through a less expensive means? Probably, meaning the cost is most likely unreasonable.

While the checklist produces some “yeses,” in the end, it is doubtful that the IRS would consider this a bona fide tax-deductible business expense.

Let’s change this up.

Bob Broker Hits the Big Time

Imagine Bob Broker has progressed to managing high-priced commercial real estate with properties in multiple states. Bob caters to clients who pay around $10,000 a month to rent or lease one of his properties and $1.5 million or more to purchase. Bob feels it is a practical business decision to buy a jet and keep a pilot on standby at $250/hour to fly prospective and current tenants and real estate agents to and from the various properties.

If you think this what-if scenario is far-fetched, check out the case of Palo Alto Town & Country Village, Inc. v. Commissioner (9th Cir. 1978) (Source)


Tax Deductions for Realtors®

Now that we have an idea of what the IRS might consider a tax deduction, let’s turn to some of the most common tax deductions for Realtors®.

Business Use of Auto

You have the option of either calculating the actual costs of using your vehicle or using the standard mileage deduction. (The current mileage rate is 54.5 cents per mile, so if you drive 10,000 miles or more, it will likely make more sense to use the mileage deduction than the actual costs.)

Mileage Deduction

This is where you get to write off all the driving around town showing houses, picking up coffee for client meetings, and more!

First, record your odometer reading at the start of the tax year. (Have your oil changed once or twice a year for easy 3rd-party verification of the actual miles.) Try using the app MileIQ for stress-free logging.

Keep in mind, mileage between houses and the office (and other business-related appointments and errands) can be written off, but mileage from your home to the office cannot.

  • If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.
  • If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.

Actual Auto Expenses

Alternatively, you could choose to write off auto expenses. (Your accountant can help you determine which makes more sense for you). Auto expenses include:

  • Depreciation
  • License and registration fees
  • Interest expense
  • Gas
  • Insurance
  • Repairs
  • Garage rent
  • Tires
  • Parking fees and tolls (Fees related to parking your car at your place of work are nondeductible commuting expenses)
  • Lease payments
  • Casualty and theft loss (If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. See Pub. 547, Casualties, Disasters, and Thefts.)
  • Mixed-use mortgage (If you used a home equity loan to purchase your car, you may be able to deduct the interest, too. See Pub. 936, Home Mortgage Interest Deduction.)

While you can deduct parking fees and tolls, your parking tickets will have to come out of your own pocket.

Commission and Referral Expenses

Did you get a commission advance? Go ahead and write off the fees associated with it! Fees taken out of your commission are a deductible business expense. So are commission and referral fees paid to other agents.

Marketing and Advertising Expenses

This category will likely account for a large portion of your expenses as a Realtor®. Here is a partial list to get your wheels turning:

  • Open house expenses
  • Printed flyers
  • Postcards
  • Business cards
  • Online marketing
  • Leads/mailing lists
  • Virtual staging
  • Design and production fees
  • Website hosting

While a skywriting campaign might not be considered tax-deductible, your list of allowable marketing and advertising expenses is probably more extensive than you think it is.

Continuing Education Expenses

The cost of continuing education classes can also be deducted. Even classes that don’t necessarily correlate to real estate could qualify for the Lifetime Learning Credit. Keep track of all education-related expenses just in case.

Professional Dues and Subscriptions

Most likely, you are required to be a part of a Realtor® association and those dues can be written off. (Unfortunately, you cannot write off your golf, health, athletic, or country club dues.)

Business Gift Expenses

Sending closing gifts to clients is a wonderful detail that goes a long way in creating positive relationships. And if you do send gifts, make sure you save your receipts! You can deduct up to $25 per person per gift.

Office Expenses

Here are some common office expenses you won’t want to forget:

  • Rent for your office
  • Cleaning fees
  • Computer software
  • Internet access fees
  • Office supplies
  • Laptop and printer expenses
  • Postage

Travel Expenses

Travel expenses are considered “…the ordinary and necessary expenses of traveling away from home for your business.” If a spouse, dependent, or other individual goes with you on a business trip or to a business convention you generally can’t deduct their travel expenses unless they are an employee or have a genuine business purpose for travel.

Meals and Entertainment

Currently, meals — with clients, co-workers and during travel where business is discussed — are 50% deductible.  Entertainment and recreation expenses (box office seats, non-profit high school sporting events, etc.) are not currently deductible. However, annual company picnics or holiday dinners are 100% deductible. Depending on your business structure, you might be able to “rent” your home office to your company for a meeting or event. You’d invoice your company, your company would pay you a reasonable rate for office or event space rental, and your company could write it off as a business expense. You should be able to rent up to 14 times per year without claiming the expense as income. Check with your tax professional on this one!

Miscellaneous Expenses

Here are other important deductions you won’t want to miss:

  • Accounting and legal fees
  • Professional fees (for all the times you hired an architect, engineer, or other professional to help get a listing to market)
  • Seminars, conferences, and trade shows
  • Air BNB/short-term rentals of 7 days or less
  • Insurance (health, liability, etc.)
  • Interest (loans and credit cards)
  • Retirement plan contributions
  • Wages paid to employees (consider setting yourself up as an S Corp. You could be your own employee, which could save you money at tax time!)

This is a lot of info to remember, so we’ve done the hard work and created a handy expense tracking template specifically for Realtors®. Download our mobile app, “Advanced Producer” to get the free template. You can use it alone or in combination with helpful financial tracking apps like Mint, Dollarbird, and Empower.

If you devote just a few minutes a day to noting your daily expenses (maybe while your coffee is brewing!), it will become a habit, keep you organized, and get you the return you deserve!

Are you ready to get the upper hand when it comes to your taxes? There are plenty of opportunities for legit write offs if you know where to look. (By the way, if the subject of tax deductions sounds at all boring or intimidating, read more to see why this could be the most exciting and profitable read this week!) 

We’ve put together our best “crash course in tax deductions,” including a list of top write offs for Realtors® and resources for helping you track your expenses. With a little time and planning, you’ll be amazed what a difference it can make come tax time!

Friendly reminder: your income taxes are serious business and we are not tax experts. Please consult with your tax professional before making any tax-related decisions.

Spending money on your business might not always seem like fun, but discovering legitimate tax write offs along the way makes investing in your business much more meaningful.

Why Are Tax Deductions Important?

Tax deductions reduce your taxable income. Rather than be taxed on your gross receipts, your business is generally taxed on your net income — the portion of income that is remaining after your business-related expenses are considered. For example, let’s say you earned $75,000 last year and you can substantiate $20,000 in deductions. You will only be taxed on $55,000.

The IRS is not obligated to honor any tax deductions if they are not substantiated, though — even if the IRS agrees that an expense is legitimate. So, it’s a good idea to keep your receipts! Apps like Expensify, Zoho Expense, and Evernote make it easy to keep and file digital copies of receipts.

Code 162(a): Your New Buddy

Spending money on your business might not always seem like fun, but discovering legitimate tax write offs along the way makes investing in your business a much more purposeful endeavor. It can also remove some of the psychological burden, knowing that you’ll be able to write off a lot of your expenses and reduce your taxable income. But you need to start thinking about your tax strategy at the BEGINNING of the year and keeping a paper trail, even if it’s digital, so you and your tax professional can choose the deductions that will make the most sense for you.

There are only a few guidelines to remember, neatly contained in IR Code 162(a). It isn’t rocket science, but it is Internal Revenue Service code, so dare we say it’s designed to confuse you.

IR Code 162(a) states that, with a few exceptions, any expense for your business should be a write off if it is:

• ordinary and necessary (appropriate and helpful in the development of the business)
• directly related to your business
• incurred or paid during the taxable year
• while carrying on a trade or business
• reasonable in amount

Let’s break this down with an example.

Bob Broker’s Skywriting Campaign

Bob Broker feels it’s important to go to extreme lengths to advertise. Let’s say Bob buys an airplane and keeps a pilot on call at $250/hour to do sky writing with his business logo in the sunny skies above his hometown of 5,000 people whenever the weather is nice.

Sounds crazy, right? Let’s go through the check list and find out how this situation scores.

  • Is it ordinary and necessary (appropriate and helpful in the development of the business)? It’s hardly ordinary. And while the skywriting advertising could be helpful, it might not be appropriate to this type of business or for the target market.
  • Is the advertising message directly related to Bob’s business? Yes.
  • Were the expenses incurred or paid during the taxable year? Yes, the skywriting took place during the taxable year. We’ll assume the airplane was purchased during the taxable year, too. Depending on the cost, the airplane itself may be considered a capital expenditure and would need to be amortized – if it would even qualify as a legitimate business expense at all.
  • Was the expense incurred in the course of carrying on a trade or business? Yes. The business existed during the tax year.
  • Is it reasonable in amount? Well, since “reasonable” is subjective, and IR Code 162(a) puts no cap on a “reasonable amount,” let’s change the last checklist point to…
  • Could this same task of advertising to 5,000 local people be carried out through a less expensive means? Probably, meaning the cost is most likely unreasonable.

While the checklist produces some “yeses,” in the end, it is doubtful that the IRS would consider this a bona fide tax-deductible business expense.

Let’s change this up.

Bob Broker Hits the Big Time

Imagine Bob Broker has progressed to managing high-priced commercial real estate with properties in multiple states. Bob caters to clients who pay around $10,000 a month to rent or lease one of his properties and $1.5 million or more to purchase. Bob feels it is a practical business decision to buy a jet and keep a pilot on standby at $250/hour to fly prospective and current tenants and real estate agents to and from the various properties.

If you think this what-if scenario is far-fetched, check out the case of Palo Alto Town & Country Village, Inc. v. Commissioner (9th Cir. 1978) (Source)


Tax Deductions for Realtors®

Now that we have an idea of what the IRS might consider a tax deduction, let’s turn to some of the most common tax deductions for Realtors®.

Business Use of Auto

You have the option of either calculating the actual costs of using your vehicle or using the standard mileage deduction. (The current mileage rate is 54.5 cents per mile, so if you drive 10,000 miles or more, it will likely make more sense to use the mileage deduction than the actual costs.)

Mileage Deduction

This is where you get to write off all the driving around town showing houses, picking up coffee for client meetings, and more!

First, record your odometer reading at the start of the tax year. (Have your oil changed once or twice a year for easy 3rd-party verification of the actual miles.) Try using the app MileIQ for stress-free logging.

Keep in mind, mileage between houses and the office (and other business-related appointments and errands) can be written off, but mileage from your home to the office cannot.

  • If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.
  • If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.

Actual Auto Expenses

Alternatively, you could choose to write off auto expenses. (Your accountant can help you determine which makes more sense for you). Auto expenses include:

  • Depreciation
  • License and registration fees
  • Interest expense
  • Gas
  • Insurance
  • Repairs
  • Garage rent
  • Tires
  • Parking fees and tolls (Fees related to parking your car at your place of work are nondeductible commuting expenses)
  • Lease payments
  • Casualty and theft loss (If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. See Pub. 547, Casualties, Disasters, and Thefts.)
  • Mixed-use mortgage (If you used a home equity loan to purchase your car, you may be able to deduct the interest, too. See Pub. 936, Home Mortgage Interest Deduction.)

While you can deduct parking fees and tolls, your parking tickets will have to come out of your own pocket.

Commission and Referral Expenses

Did you get a commission advance? Go ahead and write off the fees associated with it! Fees taken out of your commission are a deductible business expense. So are commission and referral fees paid to other agents.

Marketing and Advertising Expenses

This category will likely account for a large portion of your expenses as a Realtor®. Here is a partial list to get your wheels turning:

  • Open house expenses
  • Printed flyers
  • Postcards
  • Business cards
  • Online marketing
  • Leads/mailing lists
  • Virtual staging
  • Design and production fees
  • Website hosting

While a skywriting campaign might not be considered tax-deductible, your list of allowable marketing and advertising expenses is probably more extensive than you think it is.

Continuing Education Expenses

The cost of continuing education classes can also be deducted. Even classes that don’t necessarily correlate to real estate could qualify for the Lifetime Learning Credit. Keep track of all education-related expenses just in case.

Professional Dues and Subscriptions

Most likely, you are required to be a part of a Realtor® association and those dues can be written off. (Unfortunately, you cannot write off your golf, health, athletic, or country club dues.)

Business Gift Expenses

Sending closing gifts to clients is a wonderful detail that goes a long way in creating positive relationships. And if you do send gifts, make sure you save your receipts! You can deduct up to $25 per person per gift.

Office Expenses

Here are some common office expenses you won’t want to forget:

  • Rent for your office
  • Cleaning fees
  • Computer software
  • Internet access fees
  • Office supplies
  • Laptop and printer expenses
  • Postage

Travel Expenses

Travel expenses are considered “…the ordinary and necessary expenses of traveling away from home for your business.” If a spouse, dependent, or other individual goes with you on a business trip or to a business convention you generally can’t deduct their travel expenses unless they are an employee or have a genuine business purpose for travel.

Meals and Entertainment

Currently, meals — with clients, co-workers and during travel where business is discussed — are 50% deductible.  Entertainment and recreation expenses (box office seats, non-profit high school sporting events, etc.) are not currently deductible. However, annual company picnics or holiday dinners are 100% deductible. Depending on your business structure, you might be able to “rent” your home office to your company for a meeting or event. You’d invoice your company, your company would pay you a reasonable rate for office or event space rental, and your company could write it off as a business expense. You should be able to rent up to 14 times per year without claiming the expense as income. Check with your tax professional on this one!

Miscellaneous Expenses

Here are other important deductions you won’t want to miss:

  • Accounting and legal fees
  • Professional fees (for all the times you hired an architect, engineer, or other professional to help get a listing to market)
  • Business entertainment
  • Seminars, conferences, and trade shows
  • Air BNB/short-term rentals of 7 days or less
  • Insurance (health, liability, etc.)
  • Interest (loans and credit cards)
  • Retirement plan contributions
  • Wages paid to employees (consider setting yourself up as an S Corp. You could be your own employee, which could save you money at tax time!)

This is a lot of info to remember, so we’ve done the hard work and created a handy expense tracking template specifically for Realtors®. Download our mobile app, “Advanced Producer” to get the free template. You can use it alone or in combination with helpful financial tracking apps like Mint, Dollarbird, and Empower.

If you devote just a few minutes a day to noting your daily expenses (maybe while your coffee is brewing!), it will become a habit, keep you organized, and get you the return you deserve!

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