What Can a Realtor Write Off on Taxes? A Breakdown

Realtors, often operating as independent contractors, have specific opportunities to reduce their taxable income through the deduction of legitimate business expenses. Understanding these available write-offs is important for managing finances and accurately reporting income.

Foundational Principles of Realtor Tax Deductions

The Internal Revenue Service (IRS) defines a deductible business expense as one that is both “ordinary and necessary” for operating a trade or business. An ordinary expense is common and accepted in the real estate industry. A necessary expense is helpful and appropriate for the business. These criteria are fundamental to determining what costs can be claimed.

Most realtors function as independent contractors, meaning they are self-employed for tax purposes. This requires them to report business income and expenses on Schedule C (Form 1040), Profit or Loss from Business. As self-employed individuals, they are responsible for both the employer and employee portions of Social Security and Medicare taxes, known as self-employment tax.

Only costs directly related to business operations are deductible. Mixing personal and business finances can complicate tax reporting and lead to disallowed deductions upon IRS review. For accounting purposes, most self-employed realtors typically use the cash method, reporting income when received and expenses when paid.

Key Categories of Deductible Business Expenses

Vehicle Expenses

Realtors frequently use their personal vehicles for business activities, making vehicle expenses a significant deduction category. Taxpayers can choose between two methods: the standard mileage rate or actual expenses. The standard mileage rate, set annually by the IRS, allows a deduction for each business mile driven. This method is often simpler as it only requires tracking mileage.

Alternatively, realtors can deduct actual vehicle expenses, which involves more detailed record-keeping. This includes costs such as gasoline, oil, repairs, tires, and insurance premiums. Actual expenses can also include vehicle registration fees, lease payments, and depreciation if the vehicle is owned. Choosing between these methods depends on which provides a larger deduction and the level of record-keeping preferred.

Home Office Deduction

The home office deduction is available if a specific area of the home is used exclusively and regularly as the principal place of business. Exclusive use means the space is solely for business, not personal activities. Regular use means it is used on an ongoing basis. This deduction is generally available if the home office is where the realtor conducts administrative tasks, meets clients, or performs other essential business functions.

There are two methods to claim this deduction: the simplified method or the regular method. The simplified method allows a deduction of $5 per square foot of the home office space, up to a maximum of 300 square feet. The regular method requires calculating the actual expenses of the home office, including a portion of mortgage interest, rent, utilities, insurance, and depreciation. The regular method can yield a larger deduction but requires more detailed calculations and record-keeping.

Marketing and Advertising

Expenses incurred to promote real estate services are generally fully deductible. This includes the costs associated with creating and maintaining a professional website, online advertising campaigns, and traditional print advertisements. Signage for properties, brochures, and professional photography for listings are also deductible. Costs related to open houses, such as refreshments or staging expenses, can be deducted as marketing. Gifts given to clients are deductible, but there is a specific limitation: a maximum of $25 per client per year can be deducted for business gifts. This limit applies to the cost of the gift itself, not to incidental costs such as packaging or shipping.

Professional Fees and Dues

Realtors incur various professional fees and dues to maintain their licenses and access industry resources. These include Multiple Listing Service (MLS) fees, membership dues for professional organizations, such as national or local realtor associations, and state licensing fees and renewals. Any fees or splits paid to a brokerage are also considered ordinary and necessary business expenses. These expenses are directly related to the realtor’s ability to conduct business.

Office Supplies and Equipment

The cost of supplies and equipment used in the business operation is deductible. This includes purchases of computers, printers, and specialized software. Basic office supplies such as stationery, pens, and business cards are also deductible. Larger purchases, such as office furniture or significant technological equipment, may need to be depreciated over several years rather than fully expensed in the year of purchase. However, certain provisions like Section 179 deduction or bonus depreciation may allow for immediate expensing of these assets in the year they are placed in service, provided specific criteria are met.

Travel and Entertainment (Meals)

Business-related travel expenses, when away from the tax home overnight, are deductible. This includes the costs of lodging, airfare, train tickets, and other transportation expenses. The purpose of the travel must be directly related to business. Business meals, when conducted for a legitimate business purpose, are generally 50% deductible. This applies to meals with clients, colleagues, or during business travel. The expense must not be lavish or extravagant, and sufficient records must be kept to substantiate the business purpose of the meal.

Business Insurance

Insurance premiums paid for coverage directly related to the real estate business are deductible. This commonly includes Errors and Omissions (E&O) insurance, which protects realtors from claims of negligence or mistakes in their professional services. General liability insurance, which covers risks like client injuries on business property, is also deductible.

Legal and Professional Services

Fees paid for legal and professional advice related to the business are deductible. This includes payments to attorneys for contract review or legal counsel on business matters. Fees paid to accountants or bookkeepers for tax preparation, financial planning, or maintaining business records are also fully deductible.

Education and Training

Expenses for education and training undertaken to maintain or improve skills required in the real estate profession are generally deductible. This includes costs for seminars, workshops, and courses directly related to real estate practices. However, education that qualifies a realtor for a new trade or business, rather than improving existing skills, is typically not deductible.

Technology and Communication

The business portion of technology and communication services can be deducted. This includes a portion of personal cell phone plans if the phone is used for business calls and communications. A portion of home internet service can also be deducted if used for business purposes. Subscription fees for Customer Relationship Management (CRM) software and e-signature services are also fully deductible.

Essential Record-Keeping for Tax Purposes

Maintaining accurate and thorough records is paramount for realtors to substantiate their tax deductions. The IRS requires taxpayers to keep records that support their income, expenses, and credits. Without adequate records, the IRS may disallow expenses, leading to additional taxes, penalties, and interest.

Records should include original receipts, invoices, canceled checks, and bank or credit card statements that clearly show the amount, date, and business purpose of each transaction. For vehicle expenses, a detailed mileage log that tracks business miles, dates, destinations, and purposes is necessary. Appointment books, calendars, and contracts can also serve as supporting documentation.

Realtors can choose various methods for record-keeping, including physical files, digital scans, or specialized accounting software. Digital records, when properly backed up, can offer convenience and security. Regardless of the method, it is important to retain all supporting documentation for a minimum of three years from the date the tax return was filed or the due date of the return, whichever is later.

Reporting Business Deductions on Your Tax Return

Realtors, as self-employed individuals, primarily report their business income and expenses on Schedule C (Form 1040), Profit or Loss from Business. This form is used to calculate the net profit or loss from their real estate activities. All deductible business expenses identified and documented throughout the year are entered on this form.

The total amount of these deductible expenses is subtracted from the gross income earned from real estate sales and commissions. This calculation results in the business’s net profit or loss. A net profit from Schedule C is then carried over to Form 1040, where it becomes part of the realtor’s total adjusted gross income. This net profit is also subject to self-employment tax, which covers Social Security and Medicare contributions.