10 Strategies to Help Realtors Save on Income Taxes

“Your ability to deduct as much from your tax bill as you can is a form of income,” says Christie Perkins, an agent with Coldwell Banker Hartung in Tallahassee. “If you’re not doing it properly, you’re losing money or not taking advantage of extra income.”

Unfortunately, tax planning can be a challenge for real estate professionals who don’t have a steady income.

Read on for savvy strategies from experts to help reduce your own tax bill.

1. Structure your business for tax efficiency

Meet with your tax advisor to make sure your business is set up for tax efficiency, recommends Jack Edwards, a CPA in Lake Mary.

For instance, Lisa Baltozer, a broker associate with Better Homes and Gardens Real Estate Thomas Group, structured her business as a Professional Limited Liability Company, also known as a PLLC or PL.

“By structuring as a PL, I can file my taxes as an S-Corporation, which saves on taxes,” she explains. “I pay myself payroll, which I choose to do quarterly, and pay income taxes through my payroll. I can then take owner distributions from my account without paying income taxes.”

Although setting up business entities involves some up-front costs, annual fees and advice from an attorney and accountant, in the long run, the tax savings outweigh these costs, Baltozer says.

2. Separate your accounts

Choose a bank that provides downloadable, editable monthly statements, says Perkins.

Then, establish separate credit cards and corresponding bank accounts for personal and business expenses, she advises. Pay each set of expenses from each relevant account. In Perkins’ case, she maintains three separate cards and accounts: for personal, real estate sales and rental properties.

3. See your accountant before tax season

The average accountant completes 200–300 tax returns per year and spends two hours on each one, says Sandy Botkin, former IRS attorney and author of “Lower Your Taxes—Big Time!”. That means your tax pro won’t have much time to spend on yours.

For the smartest strategy, see your accountant for tax advice between late April and December—not during tax season.

4. Save for taxes

Review your tax situation near the end of the year to come up with a strategy, Edwards suggests. Then, take the Safe Harbor rules into account to avoid estimated tax penalties, says Botkin. Basically, if your adjusted gross earnings were $150,000 or less this year, you must pay 100% of last year’s taxes to meet the safe harbor from estimated tax penalties, he explains.

However, if your adjusted gross earnings were more than $150,000, the safe harbor is to pay 110% of last year’s taxes, which includes any FICA taxes that you paid. Either way, save at least that much money, earmarking it for tax time. New real estate professionals often forget this critical step, says Perkins. “For each dollar you earn in commissions, remember to put a certain percentage in a tax savings account,” she advises.

5. Don’t miss any deductions

Real estate professionals are missing out on hundreds of millions of dollars in tax deductions each year, Botkin estimates. When filing, take advantage of every possible one, including less obvious expenses like license and renewal fees, real estate association dues, auto insurance, multiple listing service dues and brokerage desk fees.

6. But make sure each deduction is reasonable

“Don’t tempt the audit gods,” warns Perkins. “There’s a big difference between fraud and creative accounting, and you have to be careful not to cross that line.” In fact, she knows several top-producing real estate agents who were audited and, because they’d kept such detailed records, ended up getting money back from the government. “When you file each deduction, assume that you could be audited.”

7. Track expenses and keep receipts

“Tracking expenses is not fun,” says Baltozer, “but doing it correctly will save you so much come tax time.”

When documenting deductions, keep detailed records, Botkin suggests. For instance, if expensing a restaurant meal, note the name of your fellow diner, the restaurant, the reason for the meal, the date of the meal, the type of meal and how much you spent.

Also keep receipts, says Perkins, who holds on to them for seven to eight years. Since it’s difficult to find time to keep detailed notes, consider hiring a bookkeeper and opt for automated tracking methods whenever you can. For instance, Baltozer uses the Mile IQ app to track her mileage.

8. Purchase big-ticket items to offset high-income years

To offset some of your income in a particularly lucrative year, consider making a large purchase during that taxable year.

For instance, if you need a new car, go ahead and buy one, suggests Botkin. After all, ever since Congress reformed the tax code in 2018, vehicle deductions have been much improved, he explains. For one, you can now take a 100% deduction on a vehicle used for business, even if you bought it in December of that taxable year. The only catch: You must buy one that weighs at least 6,000 pounds, such as a large SUV, truck or van.

Even if you don’t buy a new car, you can still triple the annual write-off of your vehicle.

For instance, you can write off a $50,000 car in about five years (instead of 15 years, which it would have taken in the past). You can also triple the depreciation write-off; though keep in mind that there are maximum depreciations per vehicle per year. Also consider buying other big-ticket items, such as computers and electronics, Edwards says. One of his clients saved $4,000 (in advance tax credit) by purchasing a $1,000 computer.

9. Buy investment properties

One way to increase deductions and offset income is to purchase rental properties.

Perkins believes that many real estate professionals have investment properties after five to 10 years in the business, partially for this reason. Not only are the properties deductible, so are expenses relating to them, like new furniture or even restaurant meals near your rental (then, recommend those restaurants in a booklet you leave for guests). You can even deduct travel to investigate potential rental properties, she adds.

Just make sure you have proof that your trip was for business, such as email correspondence with a broker at that destination.

10. Fund retirement accounts

“Retirement accounts are a great way to reduce the amount of income taxed for the current year,” says Edwards. “I contribute the maximum allowed to an IRA,” says Baltozer, who adds that she’s planning to set up a SEP IRA this year to start saving directly from her business. Once you select your retirement plan, learn the key details, Edwards advises. For example, some accounts require that you determine employee deferrals prior to the end of the year. If you have a traditional or a Roth IRA, you have until April 15 of the following year to make your contributions. Whichever plan you choose, though, be careful not to flip properties inside an IRA or a 401K, he warns. “If you operate an active business in your IRA, you could face severe consequences.” #

Plus: don’t miss these 19 deductions!

1. Business vehicle mileage
2. Buying or leasing a new car
3. Office rent
4. Office supplies
5. Office equipment
6. Internet and phone costs
7. Cell phones and tablets
8. Real estate software and apps
9. Marketing and advertising costs
10. Desk and franchise fees
11. Annual dues and membership fees
12. Conventions, conferences and training
13. Client gifts
14. Continuing education
15. Legal or professional services
16. Small-business and E&O insurance
17. Wages and benefits paid to employees
18. Retirement plan contributions
19. Interest on business loans or business credit cards
    SOURCE: fitsmallbusiness.com

Dina Cheney is a Connecticut-based freelance writer.