Do Real Estate Agents Qualify for the QBI Deduction?

The Qualified Business Income (QBI) deduction allows certain self-employed individuals and business owners to deduct up to 20% of their qualified income, potentially reducing taxable income. Many real estate agents operate as independent contractors and may be eligible for this tax break, but qualification depends on several factors, including employment classification, business structure, and proper documentation.

Self-Employed Agent QBI Eligibility

Real estate agents working as independent contractors may qualify for the QBI deduction under Section 199A of the Internal Revenue Code. This deduction applies to pass-through businesses such as sole proprietorships, partnerships, and S corporations. Since most agents earn commissions rather than wages, they typically qualify.

To be eligible, income must come from a trade or business. Agents involved in brokerage services, negotiations, and client transactions generally meet this requirement. However, income limits affect eligibility. In 2024, the taxable income threshold is $191,950 for single filers and $383,900 for joint filers. Agents earning above these amounts may see their deduction reduced or eliminated if classified under a specified service trade or business (SSTB).

The SSTB designation applies to professions relying on an individual’s reputation or skill, including consulting and financial services. Some real estate agents, particularly those providing advisory services, may fall into this category. Below the income threshold, they can claim the full 20% deduction. Above it, the deduction phases out due to wage and capital limitations.

Employee vs. Independent Contractor Status

A real estate agent’s classification as either an employee or an independent contractor determines QBI deduction eligibility. The IRS evaluates classification based on control—how much authority a brokerage has over an agent’s work.

Employees receive W-2 wages, follow company policies, and may receive benefits such as health insurance or retirement contributions. These wages do not qualify for the QBI deduction. Independent contractors, however, operate with more autonomy, set their own schedules, cover business expenses, and typically earn income through commissions.

The IRS applies a three-factor test to determine classification:

– Behavioral control: Does the brokerage dictate how the agent performs their work?
– Financial control: Does the agent have the opportunity for profit or loss based on their business decisions?
– Nature of the relationship: Do contracts or benefits indicate an employer-employee relationship?

Misclassification can lead to tax penalties, back taxes, and interest. Brokerages that misclassify workers may face fines and liability for unpaid benefits. Agents should review their contracts and work arrangements to ensure proper classification.

Business Structure Choices

The business structure a real estate agent selects affects tax obligations and QBI deduction eligibility. Common structures include sole proprietorships, limited liability companies (LLCs), and S corporations.

A sole proprietorship is the simplest option, requiring no formal registration beyond business licenses. However, it does not provide liability protection, meaning personal assets could be at risk in legal disputes. All net income is subject to self-employment taxes—15.3% on earnings up to $168,600 in 2024, with a 2.9% Medicare tax continuing beyond that threshold.

An LLC offers liability protection, shielding personal assets from business debts. By default, a single-member LLC is taxed as a sole proprietorship, meaning income passes through to the owner’s personal tax return. An LLC can elect to be taxed as an S-corp, which may reduce self-employment tax obligations.

An S-corp allows an agent to take part of their earnings as a salary, subject to payroll taxes, while distributing the rest as profit. This structure can lower self-employment taxes, but the IRS requires owners to pay themselves a “reasonable salary” before taking distributions. S-corps also involve additional administrative work, including payroll processing and corporate tax filings.

Documenting Qualifying Income

Accurate recordkeeping is essential for real estate agents claiming the QBI deduction. The IRS requires documentation of business income and expenses to substantiate eligibility. Agents should maintain commission statements, 1099-NEC forms, and client invoices to distinguish qualifying business income from non-qualifying sources such as investment gains.

Tracking business expenses is equally important. Office rent, marketing costs, continuing education fees, and technology expenses should be documented with receipts and categorized in accounting software. The IRS scrutinizes excessive or improperly classified deductions, so maintaining a clear paper trail is necessary. Bank statements and credit card records should align with reported expenses to avoid discrepancies.

By ensuring proper classification, choosing the right business structure, and maintaining thorough documentation, real estate agents can maximize their QBI deduction and reduce taxable income.