When filing tax returns, it’s essential you aren’t missing out on any business expenses which can cause to you pay too much in income taxes. Here are a few of the many tax deductions that are often overlooked by real estate agents.
The top overlooked tax deduction for real estate Agents is the home office deduction. Many real estate agents don’t claim the deduction because their tax professional says it will “raise a red flag” with the IRS. In my opinion, if you are entitled to the deduction then you should claim it. In order to take a deduction for the home office, the office space must be used regularly and exclusively for the business. It can’t be the “office” by day and the dining room table by night.
You can claim indirect expenses based on the square footage of the home office compared to the square footage of the house. Common indirect expenses include:
- Mortgage interest
- Property taxes
- Repairs and Maintenance
- Water/sewer, trash, snow plowing, and lawn care.
You can also claim direct expenses, such as painting the office space or repairs that are made specifically to the home office space. If you aren’t able to deduct all of your home office expenses in one year, then the disallowed deductions can be carried forward.
Another overlooked expense is automobile expenses. You can either claim the actual expenses or the standard mileage allowance. For 2016 the standard mileage rate is $0.54 per business mile. In order to deduct the expense, the mileage must be related to the business and you must be able to document the where, the why, and the who. Just driving around looking at houses does not constitute a business expense. If you choose to claim the actual expenses, you must still keep an auto mileage log. You will then be able to depreciate your vehicle and also claim the gas expense plus repairs and maintenance. No matter which method you choose, you can also deduct parking and tolls separate from the auto expenses.
The biggest expense, however, that is often overlooked by real estate agents is not employing family members, especially children, to work in the business. Employing your children is a great income-shifting strategy, since your children will probably be in a much lower tax bracket. When you employ your children, they are receiving “earned” income, so it is not subject to the “kiddie tax”. However, you must consider several factors:
- Appropriate work must be done in the business
- Services must be actually rendered
- Child’s wages are deducted as a business expense
- May save the education credit that is lost by the parent due to adjusted gross income limits
You can also employ adult family members, such as your spouse. If you do employ your adult family members, you can justify a larger salary to them. Any wage and benefit plan contributions are then deducted as business expenses. Also, the employee-spouse of a sole proprietor can contribute to an IRA or be included in retirement plans. Finally, any adjusted gross income-based deductions and/or phase-outs and exclusions are maximized.
If you want to make sure that you aren’t missing out on any expenses and therefore paying too much in income tax, please give our office a call. We will make sure you aren’t paying more than your fair share of tax.
Also, be sure to give us a call at (855) 479-2400 for a complimentary 3-Year Return Review and complimentary Business Expense Consultation.