Now that we've entered the tax season, it is time to think about tax deductions. Almost everything you buy for your real estate business is tax deductible as long as it is ordinary and necessary and the cost is reasonable. These deductions can really add up as savings for your business. For example, if you buy a $2,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 24% federal income tax bracket, this would save you $480 in income tax. In effect, you'd be getting a 24% discount on the computer. The catch is you must really be in business and use the computer or other item you buy for the business. You can't deduct personal expenses.
Here are the most common tax deductions taken by real estate pros:
1. Car Deductions: The single most claimed tax deduction for all small businesses is car and truck expenses. The cost of all driving you do for your real estate business, with the important exception of commuting to and from your home to work, is tax deductible. If you like recordkeeping, you can keep track of all your car expenses to figure your annual deduction. But, if you'd rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. (Check the IRS website for current annual rates.) 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.
2. Office Expenses: The amounts you spend on your business office are deductible business expenses. For example, you may deduct the rent and utilities you spend for an office. But, if you work at home, you may be able to deduct the cost of your home office. This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible.
3. Business Travel: You may also deduct your expenses when you go out of town for your real estate business. These include airfare or other transportation costs and hotel or other lodging expenses. But, you may only deduct 50% of the cost of meals when you travel on business. If you plan things right, you can even mix pleasure and business and still get a deduction.
4. Meals: The days of the deductible three-martini lunch are pretty much at an end. To deduct the cost of a meal in a restaurant, you must have a serious business discussion before, during, or soon after the event. Moreover, you may only deduct 50% of your business meal costs. Starting in 2018, you may not deduct entertainment expenses—for example, treating a client to a baseball game or the theater.
5. Business Property: Tangible personal property for your business that will last more than one year—for example, a copy machine—can usually be deducted in a single year using 100% bonus depreciation (in effect through 2022), Section 179, or the de minimis safe harbor (applicable to property that costs $2,500 or less). This enables you to get a big deduction in a single year rather than spreading it out over several years. If you elect to use the actual expense method to deduct your car expenses, your annual depreciation deduction is limited (check the IRS website for the amount).
Real property you buy for your business—an office building, for example—must be depreciated over many years. Nonresidential real property is depreciated over 39 years. Residential real property is depreciated over 27.5 years.
6. Supplies: Supplies are business items that you use up in less than one year. They include everything from paperclips to postage stamps.
7. Legal and Professional Services: You can deduct fees that you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your business.
8. Insurance: Insurance you buy just for your business is deductible—for example, business liability insurance or insurance for business property. If you have a home office, you may deduct a portion of your homeowners insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes.
9. Passthrough Deduction: Virtually all real estate professionals operate as pass-through businesses—that is, the business is operated as a:
The Tax Cuts and Jobs Act created a brand new deduction for owners of such pass-through businesses: They may deduct an amount up to 20% of their net income from the business. This is in addition to all their other business deductions. The pass-through deduction is a personal deduction pass-through owners can take on their returns whether or not they itemize.
However, this deduction is limited for people whose business is providing personal services, which includes real estate agents and brokers. You're entitled to the full 20% pass-through deduction only if your taxable income from all sources after deductions is less than $315,000 if married filing jointly, or $157,500 if single. The deduction is phased out if your income exceeds the $315,000/$157,500 limits. It disappears entirely for marrieds filing jointly whose income exceeds $415,000 and for singles whose income exceeds $207,500.
This deduction began on Jan. 1, 2018 and is scheduled to last through Dec. 31, 2025.
For more information on deductions and other tax issues for real estate agents and brokers, refer to the Business Tax & Deductions section of the Nolo website.