May 20, 2024
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Tax Tips for Real Estate Professionals

There are plenty of things that we Americans love. We love food, cars, football, reality TV, central air conditioning and not using the metric system. But this all pales in comparison to our love of houses.

We have a real addiction problem when it comes to houses. Do you or a loved one spend hours on Zillow checking out homes even though you just moved last week? Or maybe you find yourself wandering to the neighbor’s open house just so you can check out their redone kitchen? It’s okay, no need to deny it. The first step is admitting you have a problem.

But it turns out that we may have a bigger problem than just too much love. We may also have a financial problem when it comes to home ownership.

See, experts advise that you should spend no more than 30 percent of your monthly income on housing. Anything above 30 percent is considered a “cost burdened” home. But don’t think these experts get between us Americans and our love of home ownership. In fact, a recent study has shown that over one-third of American homes are considered cost burdened. In the NY/NJ area, we take this to a whole other level with 43 percent of the homes considered cost burdened and more than half of the households spending 50 percent or greater of their income on housing.

You may have read that and thought, “That doesn’t sound bad. You still have the other 50 percent of your income to play with.” Just keep in mind you still haven’t fed yourself so you don’t die of hunger, purchased health insurance so you can stay healthy, transported yourself to your job so you can earn said income and bought clothes so you don’t get arrested for walking around without any.

So if homes can be such a financial burden, then why do we do it? I don’t have the answer, but if history teaches us anything, it’s that we don’t care and we’ll continue to buy ourselves homes. Lots of money, no money, doesn’t matter. Just get me a home. The bigger the better. And this is why we continue to have such a high demand for real estate professionals. We want our homes and we need professionals to help us make that happen.

But I have found over the years that many real estate professionals are surprised at year-end with the amount of taxes they owe. Specifically, when they work on commission and get a 1099 as an independent contractor they can be hit hard by Uncle Sam. In these cases, it’s critical that they find ways to lower their taxable income. So here are four tax tips that can literally save you thousands in taxes if you’re a real estate professional.

Tip 1: Consider a Home Office

When you have a home office, you turn what are usually non-deductible personal expenses into business tax deductions that reduce your taxable income, as well as your self-employment taxes. Some of these otherwise personal expenses you can now deduct include a portion of the depreciation on your home, depreciation on any office furniture such as desks and chairs, maintenance and utilities and homeowner’s insurance.

And while in the past deducting a portion of your property taxes and mortgage interest was not as lucrative since you were able to deduct them as personal itemized deductions, many of you may not be itemizing deductions under tax reform, so now you can still benefit from these expenses.

Before you say, “I already have an office, though” you should know that the IRS specifically states that you can have more than one business location, including your home, for a single trade or business.

Without getting into all of the requirements for a home office, there are two things to know. The first is that the area in your home you use for the business should be exclusively used for business. Meaning, don’t claim the dining room table as your home office just because you use it during the week. The second thing to know is that if you have another office outside of the home, then you should use the home office for administrative work. This type of work includes keeping books and records, contacting clients, setting up meeting, ordering supplies etc.

Tip 2: Track Your Vehicle Expenses

Another great thing about the home office is that it turns nondeductible vehicle expenses into deductible expenses as well. See, usually your commute from your home to your office is considered a personal expense. But when you go from one office to another office then that’s a tax-deductible transportation expense.

When you have a home office, you are no longer simply commuting to work, but you are now traveling from one office to another office and this creates deductions. Traveling from either your home or office to a client’s home, an attorney’s office or something similar is also deductible.

The IRS expects you to keep a mileage log that tracks your business miles. Of course, nowadays it’s easier than ever with various apps that do the heavy lifting for you, such as MileIQ and Stride Drive.

You have two choices for deducting vehicle expenses: the IRS standard mileage rate and actual expenses. Under the IRS standard mileage rate, you may deduct a certain amount per business mile driven. In 2018, this amount is 54.5 cents per mile. So, let’s say you drove 5,000 business miles. You may now deduct $2,725 (5,000 x 54.5 cents).

Using the actual expenses method, you can deduct the business-use portion of gas, depreciation, repairs and maintenance, registration fees, insurance, car washes etc. The downside to this method is the meticulous record-keeping needed. You have a lot more expenses to keep track of and more receipts to hold on to.

Tip 3: Evaluate If an S Corp Election Works for You

A big downside to being a 1099 worker as opposed to a W-2 worker is the self-employment taxes you must pay. When you’re an employee, you pay 7.65 percent out of your paycheck for the employee half of Social Security and Medicare and your employer pays 7.65 percent for their half. But when you’re self-employed, you pay the whole enchilada. This can amount to many thousands of dollars in self-employment taxes.

The huge advantage of changing your business entity to an S Corporation is the ability to save on Social Security and Medicare taxes (also known as self-employment taxes).

This is how you can save: Even though you are the owner of an S Corporation, you are also an employee. As an employee, you pay yourself a salary to compensate you for the work you do in the business. The wages are subject to Social Security and Medicare taxes. The rest of the profits can be taken out as distributions, which are not not subject to Social Security and Medicare taxes.

While an S Corporation can be a massive tax savings when your net income is high enough, if you’re still building up your business then it may not provide any savings for you. So if you’re unsure if an S Corporation will save you money, speak to your accountant.

Tip 4: Know About the New 20 Percent Deduction

This tip is much less a tip than just something to be aware of. Under tax reform, Congress revealed the new 199A deduction for business owners. Essentially, you get a deduction equal to 20 percent of your business income. As you can imagine, this is huge windfall as this can easily be tens of thousands of dollars.

You would get the full 20 percent deduction provided that your taxable income is below $157,500 if single or $315,000 if married and get a reduced deduction until income exceeds $207,500 and $415,000 respectively. Once income was above that, many experts assumed that real estate professionals would not qualify for this deduction at all.

But the IRS provided a nice surprise gift to real estate professionals when the recently released regulations seem to allow them to get this deduction even if their income exceeds these thresholds.

By Daniel Magence

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC ( Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether its tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

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