What Business Expenses Can Realtors Write Off?

Real estate professionals frequently operate as independent contractors. Understanding business write-offs is crucial for managing taxable income, as identifying and claiming legitimate business expenses allows realtors to reduce their overall tax liability.

Understanding Business Expense Deductions

For self-employed individuals, including most realtors, business expenses directly reduce self-employment income for tax purposes. A deductible business expense must be both “ordinary and necessary.” An ordinary expense is common and accepted in the real estate industry, while a necessary expense is helpful and appropriate for the business. These expenses must be directly related to the business and not personal, living, or family expenses.

Expenses are categorized as either ordinary expenses or capital expenses. Ordinary expenses are those that are recurring and consumed within the tax year, such as office supplies or advertising. Capital expenses are for assets that provide a benefit lasting more than one year, like a computer or office furniture. The cost of capital expenses is recovered over time through depreciation rather than being fully deducted in the year of purchase.

Deductions are primarily reported through IRS Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship). This form allows self-employed individuals to calculate their net profit or loss by subtracting eligible expenses from gross income. The resulting net profit is then subject to income tax and self-employment tax.

Key Deductible Expenses for Realtors

Realtors incur various costs in their operations, many of which are deductible. Understanding these categories helps maximize tax savings.

Vehicle expenses

Vehicle expenses are a common deduction for real estate professionals who frequently travel for showings, client meetings, and property visits. Taxpayers can choose between deducting actual expenses or using the standard mileage rate. Actual expenses include costs like gas, oil, repairs, insurance, depreciation or lease payments, and vehicle registration fees. The standard mileage rate offers a simpler calculation. Accurate mileage logs are necessary to substantiate business use, regardless of the method chosen.

Home office deduction

Realtors who use a portion of their home exclusively and regularly for business can qualify for the home office deduction. This space must be the principal place of business or a place where clients are met regularly. The deduction can be calculated using either the simplified method, which allows a deduction of $5 per square foot for up to 300 square feet (maximum $1,500), or the regular method, which involves calculating the business percentage of actual home expenses like mortgage interest, rent, utilities, and insurance.

Marketing and advertising expenses

Marketing and advertising expenses are deductible. This includes costs for developing and maintaining a professional website, printing business cards, placing yard signs, and creating flyers and brochures. Expenditures for online advertisements, professional photography for listings, and expenses incurred during open houses, such as staging materials, also fall into this category.

Professional development and education expenses

Professional development and education expenses are deductible if they maintain or improve skills needed in the real estate profession. This covers real estate courses, continuing education required to maintain a license, and fees for industry conferences and seminars. Licensing fees and renewal fees are also deductible business expenses.

Office supplies and equipment

Office supplies and equipment are deductible expenses. This category includes items like computers, printers, software, stationery, and other general office supplies. Software subscriptions for customer relationship management (CRM) systems, lead generation, and email marketing are also deductible.

Professional fees

Professional fees are deductible. This includes brokerage fees, Multiple Listing Service (MLS) fees, and dues paid to professional organizations like the National Association of Realtors (NAR) or state and local Realtor associations. Legal and accounting fees for services related to the business, such as contract review or tax preparation, are also deductible.

Travel and entertainment expenses

Travel and entertainment expenses have specific rules. Business travel costs, such as airfare and lodging for out-of-town conferences or client meetings, are deductible. Business meals are subject to a 50% deduction limit. The meal must not be lavish or extravagant, and the taxpayer or an employee must be present. Entertainment expenses are generally not deductible, though the cost of food and beverages provided during an entertainment event may be deductible if purchased separately and stated on a bill.

Insurance premiums

Insurance premiums for policies directly related to the business are deductible. This includes professional liability insurance, also known as errors and omissions (E&O) insurance, which protects against claims of negligence or mistakes in professional services. General business liability insurance and commercial auto insurance for business-owned vehicles are also deductible.

Phone and internet expenses

A portion of phone and internet expenses are deductible if these services are used for business purposes. If a personal phone or internet plan is also used for business, only the business-use percentage of the cost can be deducted. Maintaining a separate line or clearly tracking business usage can simplify this deduction.

Maintaining Proper Records

Accurate and organized record-keeping is crucial for substantiating all claimed business deductions. The Internal Revenue Service (IRS) requires taxpayers to keep records sufficient to establish amounts shown on their tax returns. Proper documentation ensures compliance and can prevent issues during a tax audit.

Records to keep include receipts, invoices, bank statements, and credit card statements for all business-related transactions. For vehicle expenses, a detailed mileage log documenting business trips, dates, destinations, and purposes is required. Appointment books and calendars also serve as documentation for business activities and meetings. Electronic records, like digital receipts and scanned documents, are acceptable, as are traditional paper records. Utilizing accounting software or cloud storage solutions can help organize and safeguard these documents.

The recommended duration for keeping tax records is three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. It is advisable to keep records for six years if a taxpayer omits more than 25% of their gross income. Records related to property should be kept until the period of limitations expires for the year in which the property is disposed of.

Inadequate record-keeping can lead to serious consequences, including the disallowance of deductions, which results in a higher taxable income. The IRS may impose penalties and interest on underpaid taxes if deductions cannot be substantiated. A failure to maintain proper records can lead to more severe outcomes during an audit.