Can you deduct the cost of studying for and taking the real estate agent exam in your state? Unfortunately, the answer is no.
The costs of education, including tuition, fees, books, and other learning materials are deductible business expenses only if the education:
- helps maintain or improve skills required in your existing business, or
- is required by law or regulation to maintain your professional standing.
You cannot currently deduct as a business expense education expenses you incur to qualify for a new business or profession. This means you cannot deduct the costs of education courses you take to help prepare for your state’s real estate license exam. Nor is the fee to take the exam itself deductible. This rule applies even where a licensed real estate agent, salesperson, or sales associate pays for education to pass the state exam to become a real estate broker. Courts have reasoned that the tasks performed by licensed real estate brokers are so different from those performed by licensed real estate agents that courses taken to prepare for the broker's examination qualify an agent for a new trade or business. (Goldstein v. Comm’r, 52 TCM 1481 (1987).)
Fortunately, there is a way to obtain tax benefits from almost any type of postsecondary education expense: The lifetime learning credit. A tax credit is a dollar-for-dollar reduction in your tax liability, so it’s even better than a tax deduction.
The lifetime learning credit can by used to help pay for any undergraduate or graduate level education, including nondegree education, to acquire or improve job skills (for example, a courses you take to help pass your state’s real estate exam). If you qualify, your credit equals 20% of the first $10,000 of postsecondary tuition and fees you pay during the year, for a maximum credit of $2,000 per tax return. However, the credit is phased out and then eliminated at certain income levels: It begins to go down if your modified adjusted gross income is more than $54,000 ($108,000 for a joint return), and you cannot claim the credit at all if your MAGI is over $64,000 ($128,000 for a joint return). These are the limits for 2014; they are adjusted for inflation each year.
You can take this credit not only for yourself, but for a dependent child (or children) for whom you claim a tax exemption, or your spouse as well (if you file jointly). And it can be taken any number of times. However, you can’t take the credit if you’ve already deducted the education cost as a business expense.
Example: Bill, a self-employed real estate agent with a $40,000 AGI, spends $2,000 in tuition to take courses to qualify for his state’s real estate broker exam. He may take a $400 lifetime learning credit (20% × $2,000 = $400).
Once you obtain your real estate license, you may deduct as a business expense the cost of undergoing mandatory continuing education to maintain your license. Moreover, education that is not required to maintain an agent’s license is still deductible if it helps improve his or her skills. Thus, for example, a real estate salesperson could deduct the cost of a seminar on real estate sales trends even though it is not required to maintain his or her license.
For more information on this and other tax issues for real estate agents and brokers, refer to The Real Estate Agent's Tax Deduction Guide, by Stephen Fishman (Nolo).