Tax Filing Tips for Real Estate Agents

Tax filing can be a daunting task for any business owner, but for real estate agents? The unique nature of work adds another layer of complexity. The good news? We have prepared a series of tax filing tips available specifically for real estate professionals.

From understanding your employment structure to maximizing deductions for car expenses, marketing costs, and professional development, we’ll equip you with the knowledge to go through tax season with the utmost confidence. Read on to learn more!

Knowing Your Tax Responsibilities as a Real Estate Agent

Being a self-employed real estate agent comes with some unique tax considerations. The biggest difference from being an employee is that you’ll be responsible for paying your taxes, rather than having them withheld from your paycheck.

This means you’ll need to make estimated quarterly payments to the IRS throughout the year to cover your income and self-employment taxes.

And since you’re a self-employed individual, you’ll need to file a 1099-NEC form instead of a W-2 form. With a 1099-NEC, you’re responsible for the full 15.3% self-employment tax, which covers both Social Security and Medicare.

But, there’s a silver lining, as this tax applies to your net income after deducting business expenses, which can be substantial for real estate agents (think marketing, car mileage, etc.).

Remember, as an independent contractor, you’re responsible for making estimated tax payments throughout the year to avoid penalties. This essentially means setting aside money to pay your taxes as you earn them.

Tax Forms You’ll Need to Fill Up as a Real Estate Agent

Self-employed real estate agents must navigate several tax forms to accurately report their income and expenses to the IRS. Here’s a detailed look at the essential forms they need to fill out:

Form 1040

This is the primary form used by individuals to file their annual income tax returns. It reports total taxable income from various sources, including wages, dividends, capital gains, and self-employment income.

For a self-employed real estate agent, Form 1040 will summarize all taxable income and calculate the total tax liability. It includes sections for reporting income, claiming deductions, and applying tax credits.

Schedule C (Profit or Loss from Business)

This form is attached to Form 1040 and is specifically used to report income and expenses related to a sole proprietorship or self-employed business.

For real estate agents, Schedule C is where they detail their self-employment income, such as commissions and fees earned from property sales or rentals. It also allows for the deduction of business-related expenses, including advertising, office supplies, vehicle expenses, and professional fees.

The net profit or loss from Schedule C is then carried over to Form 1040 as part of the total income calculation.

Form 1099-NEC (Nonemployee Compensation)

This form is received from real estate brokerages or clients who have paid the agent $600 or more in commission income during the year.

The 1099-NEC reports the total amount of nonemployee compensation earned, which is included in the self-employment income reported on Schedule C.

Real estate agents need to ensure all 1099-NEC forms match their records to accurately report income and avoid discrepancies with the IRS.

Tax Filing Tips to Follow as a Real Estate Agent

Real estate agents can deduct various business expenses to reduce their taxable income. Common tax-deductible expenses include:

• Business-related mileage: Real estate agents can deduct the costs associated with driving for business purposes. They can choose between the standard mileage deduction (a set rate per mile driven for business) or the actual cost method (deducting actual expenses for gas, maintenance, and depreciation).

• Continuing education and professional development courses: Expenses for courses, seminars, and training related to maintaining or improving skills in the real estate profession are deductible.

• Real estate association dues and subscriptions: Membership fees for professional real estate organizations, as well as subscriptions to industry-related publications, are deductible.

• Marketing and advertising costs: Costs related to promoting the real estate business, such as creating and maintaining a website, printing business cards, and producing flyers or other promotional materials, are deductible.
  
• Office supplies, equipment, and software: Purchases of office supplies (e.g., paper, pens), equipment (e.g., computers, printers), and software necessary for running the real estate business can be deducted.

• Home office expenses: If a real estate agent uses a portion of their home exclusively and regularly for business, they can deduct related expenses. These may include a portion of mortgage interest, rent, utilities, and insurance. The deduction can be calculated using the simplified method (a set rate per square foot) or the actual expense method (a proportionate share of actual expenses).

Efficient Tax Planning Strategies for Real Estate Agents

Contributing to a SEP IRA or Solo 401(k) for Retirement Savings and Tax Deductions

For real estate agents, it’s a good choice to contribute to a Simplified Employee Pension Individual Retirement Account (SEP IRA) or a Solo 401(k). Both options offer substantial tax advantages and retirement savings opportunities.

A SEP IRA allows agents to contribute up to 25% of their net earnings, with a maximum limit that adjusts annually based on IRS guidelines. Contributions to a SEP IRA are tax-deductible, reducing the agent’s taxable income for the year in which the contribution is made.

A Solo 401(k) offers even more flexibility and potentially higher contribution limits. Real estate agents can make both employee and employer contributions, maximizing their savings potential.

For 2024, the elective deferral limit is $22,500, with an additional $7,500 catch-up contribution for those aged 50 or older. The total contribution limit, including employer contributions, can reach up to $66,000 or $73,500 with catch-up contributions.

Like the SEP IRA, contributions to a Solo 401(k) are tax-deductible, allowing agents to lower their taxable income.

Estimating Quarterly Taxes and Making Timely Payments to Avoid Penalties

Given their status as self-employed individuals, real estate agents are responsible for estimating and paying their taxes quarterly. This proactive approach helps avoid the potential for large, unaffordable tax bills at year-end and prevents underpayment penalties.

Agents should estimate their quarterly taxes based on their expected income, expenses, and allowable deductions. The IRS provides Form 1040-ES to assist in calculating these estimated taxes, covering both income tax and self-employment tax obligations.

Timely payment of these estimated taxes is crucial. The IRS sets specific due dates for quarterly payments: April 15, June 15, September 15, and January 15 of the following year. Missing these deadlines can result in penalties and interest charges.

Therefore, real estate agents should prioritize setting aside funds regularly to cover these payments, perhaps using a separate savings account dedicated to taxes.

Consult With a Tax Professional to Help You With Tax Filing

Filing taxes shouldn’t feel like a burden. If you need help with filing taxes, our team at Capforge is here to help. Maximize deductions, ensure compliance, and free up your time to focus on what you do best – closing deals. Contact Capforge today for personalized tax solutions by filling out the form below.