Tax Deductions For Real Estate Professionals Slides To Hand Out

Tax Deductions for Real Estate Professionals Maureen McEnroe, CFA Real Estate Broker Cell 914 588 1873... • Statutory Nonemployees• Licensed Real Estate agents are statutory nonemployee

Tax Deductions for Real Estate

Professionals

Maureen McEnroe, CFA

Real Estate Broker Cell 914 588 1873

Objective

• To educate and prepare Real Estate

Professionals to identify and maximize

deductions and maintain defensible records of their deductions.

What’s in your pocket?

It is not what you make but what you get to keep

that matters This Course will guide you through

what items are tax deductible, what records you need to keep, and how to maximize your

deductions.

•Thanks you for giving me the opportunity to

teach the Tax Deductions for Real Estate

Professionals /record keeping class I want to

preface this with the fact that I am not an

Accountant, I have MBA and I am a Chartered

Financial Analyst My background in Business but business planning and analysis is my forte Part of

my strength as an analyst is in forecasting and

planning.

• Warning this class was designed by a non-

accountant There are some complex concepts that I have tried to simplify After having

consulted with tax professionals, tax

publications, IRS documents and Publications,

this class is an overview of the allowable and

not allowable deductions Real Estate

Professionals can utilize to legally lower their tax burden and put more money in their pockets.

• As we all know it is not what we make but what

we keep that truly matters As an independent contractor, your Brokerage will give you a 1099

to represent the revenue side of the equation

• At the end of this class, you should be able to

set up the necessary records and documents to monitor and classify the various deductions

available to you

• The IRS indicates:

Licensed Real Estate Agents - Real Estate Tax Tips

• Most real estate professionals operate their

business as a sole proprietorship This means that you are not someone's employee, you

haven't formed a partnership with anyone, and you have not incorporated your business.

• Statutory Nonemployees

• Licensed Real Estate agents are statutory

nonemployees and are treated as self-employed for all Federal tax purposes, including income and

employment taxes, if:

• Substantially all payments for their services as real

estate agents are directly related to sales or other

output, rather than to the number of hours worked

• Their services are performed under a written contract

providing that they will not be treated as employees for Federal tax purposes

• This category includes individuals engaged in

appraisal activities for real estate sales if they earn income based on sales or other output.

• This means you are essentially Independent

Contractors

• IRS Publication 334 states:

• Real Estate dealer You are a real estate dealer

if you are engaged in the business of selling real estate to customers with the purpose of making

a profit from those sales Rent you receive from real estate held for sale to customers is subject

to SE tax However, rent you receive from real estate held for speculation or investment is not subject to SE tax.

The Value of Tax Deductions

• As a general rule of thumb, for agents/brokers

earning up to $100,000 per year, every dollar

deducted from your taxable income will save you

roughly $0.50 in taxes This assumes a 28% federal

income tax, 15.3% in self-employment taxes and an average of 6% state income taxes In Rockland County

we have a higher local tax so our savings are a bit

higher

• For those lucky agents making over $100,000 per

year, your deductions are worth a bit less than $0.50

on the dollar but still approaching $0.40 or so

• According to the IRS code Section 162:

• Any expense for your real estate business is deductible if it

is:

• 1) Ordinary and necessary

• 2) Directly related to your business and

• 3) A reasonable amount

• There is no upper limit on your deductions as long as they

are reasonable, and you do not deduct more than you

spend If you have Real Estate earnings of $12,000 and

you spent $15,000 on dues advertising, buying leads and other related business expenses, your deduction is limited

to the $12,000 earned The good news is that in most cases that other $3,000 is not lost, it becomes a tax loss carry

forward that can be used in future years against future

income earned

• Doing a quick back of the envelope calculation, I would

like to quickly demonstrate the value of deductions This hypothetical Real Estate Agent is a single 50-year-old

person This person earned $100,000, had business

expenses of $27.000 of which $24,000 was deductible

We assumed a 28% federal tax rate, an 8.375% local tax rate and a 15.3% Self Employment tax rate

• Take that same agent and introduce the $24,000 in

itemized deductions instead of the standard deduction of

$6,300 reduces the taxable income by $17,700 Assuming the same tax rates the agent could pay federal taxes of

$20K, State/Local taxes of $6,000 and Self-employment taxes of $6K The difference in the tax burden using the allowable deductions puts approximately $7,300 more money in this agent’s net earnings That is like have an extra closing! So lets get deducting!!

Std Deduction Itemize Deduc tion Difference

Comparing Standard Deduction to Itemized Deductions

Banking And Tax Planning

• As a new or even an experienced Agent or Broker, how exciting is

it to get that big check Lets take a step back and detail how you should be looking at this check

• As an Independent Contractor, most accountants recommend filing quarterly taxes You can’t take the deductions until year-end

when you file the fiscal year taxes, but the estimated taxes are

calculated off your anticipated gross revenue for the current year

In order to facilitate this, I recommend taking each check and

depositing it into two separate accounts Open a separate savings account that is not connected to your checking account

• If you are in the 28% tax bracket, immediately

deposit at least 25%-28% of each and every

check into this saving account This will be the account from which you will pay your quarterly tax payments

• One piece of advice I can give every agent Do

not count on the check until the deal is closed Deals fall apart for all kinds of reasons If you have already spent the money, or earmarked it for a vacation or event, not only do you lose the deal but you also lose that vacation which is

even more upsetting

Self-Employment Tax

• Employees pay a 15.3% FICA Social Security/Medicare tax This is split evenly between the employer and the employee, so the

employees paycheck is reduced by a 7.65% FICA line item

Workers pay into the Social Security and Medicare systems Employed workers are given credit for Social Security and

Self-Medicare contributions via the Self Employment Tax so these

workers will be included in these two safety net programs employment tax is 15.3% of 92.35% of the Independent

Self-Contractors Net Income However in this case the government makes an attempt to be fair Given that there is no employer with which to share this expense, the IRS allows Independent

Contractors to deduct 50% of their Self-employment tax This is itemized on the Schedule SE that has to be submitted annually with your tax return

Tax Deductions For Real Estate Professionals

• 1) Car/Truck A) If you are good at record

keeping keep track of all your car expenses and

figure out your annual deduction (Add up how much you spend for gas, oil, repairs, car washes Maintenance etc.) OR B) Track how many miles you have used

your car for business and use the standard

deduction for mileage, which is $0.575 per mile

in 2015 Note the mileage you use driving to and from work is not deductible only the mileage

used in previewing, showing, doing CMA, Open

Houses and taking clients around are deductible.

• 2) Office Expenses If you have a home office you may

be able to deduct the rent and utilities you spend for that office Renters and owners can take this

deduction.

• 3) Business travel If you go out of town for business

you can deduct airfare, transportation costs,

hotel/lodging expenses, 50% of the cost of meals

while you are away (Conferences, seminars,

education, designations etc.)

• 4) Meals and Entertainment If you take a client out

and have a serious business discussion before, during

or after the meal/event, you can deduct 50% of the cost of that meal or entertainment as a legitimate

business cost Food at Open Houses is 100%

deductible.

• 5) Depreciation Property you buy and use for

business can be depreciated over time Items like

cars, property, computers and office furniture can be depreciated over time IRS Code section 179 allows

an agent to deduct the full price of business

equipment, furniture and other long term items

purchased for your personal use in a home or brokers office in the year purchased

• 6) Supplies Business items you use up in less than

one year such as paper ink/toner for printers,

paperclips, postage etc computer software, internet and phone service fees

• 7) Legal/Professional Services Any fee you pay to an

accountant, lawyer, consultant or other professional

is deductible.

• 8) Insurance Insurance that you buy just for your

business is deductible Business liability insurance (E&O)

If you have a home office, you may be able to deduct a

portion of your homeowners insurance Self-employed people are allowed to deduct 100% of their health

insurance premiums from their income taxes Medical

expenses when they reach a certain limit and health

savings account contributions may also be deductible.

• 9) Marketing/Advertising This is a category often under reported and therefore deductions are missed

Deductions include funds spent on websites, mailing lists, newspaper or online advertising, flyers, postcards, Just

Listed Just Sold Cards, promotional materials, logo

clothing If you order pens, calendars or seeds to give to clients these are all deductible Did you take a Real Estate

Ad out in a local journal or fundraising event—it is

deductible Pictures can be another deduction

• 10) Business Gifts Many agents hand their client a

gift at the closing Each gift can be deducted for up to

$25 Unfortunately that $100 or $200 restaurant gift certificate cannot be fully deducted

• 11) Desk Fees Not all Brokers charge Desk or

Technology fees, but if they do, those fees are

deductible

• 12) Professional Dues, Fees, Subscriptions The

HGAR, NYSAR and all professional Real Estate

Organization fees and dues are deductible Your

monthly eKey charge and your bi-annual license

renewal fees are also deductible Any Real Estate

print or online magazines and periodicals you

purchase are deductible

• 13) Education Classes you take in person or

online that are necessary to maintain your

license or further your education—the cost of

these classes are deductible The cost of the

22.5 credits we must take every two years is a

deduction Please note the cost of obtaining the

Sales Agent or Brokers License is not deductible.

• 14) Retirement Plan Contributions If you make a

contribution to a retirement plan, 401k Roth IRA etc., that contribution is a nice deduction.

• 15) Interest Interest on business loans or

interest paid for a business credit card is

deductible

• Brokerages have several other tax deductions

available including, Office expenses like rent,

cleaning and maintenance, utilities, office

supplies, Referral Fees and commission rebates, franchise fees, taxes including payroll taxes for employees, state and local business taxes,

wages and benefits paid to employees

Accounting Expenses

• Accounting related to your business, your LLC or

S Corp You can deduct the cost of an

accounting system installation or

accounting/record keeping applications

purchased to manage your business.

Advertising /Marketing Expenses

• Business cards, home demonstrations,

promotional activities performed in person,

online, mailed Signs, internet Ads, fundraiser sponsorships, Ads in Periodicals, Flyers, Just

Listed/Just Sold Cards, Logo Clothing, Postcards, EDDM mailings, Lead Generation, Premium

Agent fees in Trulia, Zillow Realtor.com etc.

Automobile Deductions

• Cost of car, Garage, parking, gas, insurance,

interest, licensing, registration, inspections,

lease expenses, oil and lubrication, repairs, tires, washing and detailing Vs Mileage deductions

• If you are using the simpler mileage deduction

method you can switch to the actual cost

method at any time, but once you switch to

actual cost method, you cannot go back to

mileage method for the life of that vehicle.

Business Conventions Travel

• Travel and lodging expenses for business related

trips, conventions, trade shows, Business meals and entertainment –50% deducted Business

start-up costs have to be amortized Expenses for magazines, newspapers, periodicals used for business.

• Records must show amount spent, time and

place, business purpose and names and

business associations of individuals involved.

Commissions/ Referrals

• Commissions paid to agents for sales purchase,

leases and rentals are deductible for the broker not for the agent.

• Referral Fees, Commission Rebates, Franchise

Fees are all deductible for the Broker.

Computer Hardware & Software

• The cost of Computers generally have to be

amortized over their useful life So a $1500

laptop may provide a $500 deduction per year for three years.

• Computer Software leased or purchased has to

be amortized.

• MLS Fees, Professional Organizations or

designation societies, Local and State Realtor Associations, Chamber of Commerce and Desk Fees are deductible.

Education Expenses

• The expense of classes used to maintain or

improve your skills for your realtor business are deductible The 22.5 CE credit costs are

deductions; taking a course to get an additional designation is a deduction

• The cost of getting your Real Estate license is not

deductible

Employee Expenses & Payroll

• Gift deductions are capped at $25 or the cost

whichever is lower, health insurance, E&O

Insurance, Internet/Websites fees-if you pay,

Listing Books, RE website Premier ads on Trulia, Zillow etc., local transportation to and from

CMA, showings, property previews, listing fees if any, desk fees, technology fees, supplies, referral fees, franchise fees are deductible Start up

costs must be amortized.

Need Help? Hire Your Children

• If you need help during your busy time, hire you

minor children The wages you pay the child is deductible by you and taxable to your child

(probably at a much lower tax rate than yours)

• Wages paid to children under 18 is not subject

to payroll taxes unless you operate as a

corporation.

Home Office Expenses

• Rent, utilities, interest, RE taxes, cleaning and

maintenance, Office Supplies, Postage expenses,

RE license fees, rent on any business properties, retirement plans, subscriptions and professional journals

Occupancy Expense

• Rent, utilities, interest, Real Estate Taxes,

depreciation, cleaning and maintenance are deductible.

• Office equipment and furniture must be

depreciated

Phone Service

• Cell Phone, pagers, Internet services are

deductible.

Retirement Plans

• Contributing to some Retirement plan lowers

your taxable income while building your

retirement nest egg

• There are many types of plans in addition to

Retirement Plans-IRA (contributions are pre-tax while distributions are subject to taxation ),

Roth IRAs (contributions after taxation but

distributions are not taxed)

Record Keeping

• Documentation is your friend when it comes to

deductions The devil is in the details The IRS has strict terms and conditions for deductions and the burden is on us to provide the required proof of all expenses and deductions.

• Need to keep records/ receipts for 7 years.

Separate Accounts?

• Some agents open a separate checking account

and credit card for their Real Estate utilization

• Deposit all commission checks and pay all Real

Estate expenses from their account This makes for simple record keeping and tracking.

• Car and home office expenses should not be

paid out of this account.

Budgeting and Saving

• If you maintain a separate business account, pay

yourself a salary of no more than 50% of Gross

or 60% of Net income.

• The remaining money can be used for business

expenses, taxes and some leeway for months

when your commissions are lean.