Realtors: Claim Home Office Deduction?

Real estate agents have a lot of opportunities to deduct expenses from their taxable income. One of the most important deductions is the home office deduction, which allows agents to write off part of their home expenses if they use a portion of their home exclusively and regularly for their real estate business. This deduction can be claimed through two methods: the simplified option, which involves multiplying the square footage of the office (up to 300 square feet) by a standard rate of $5; and the actual expense method, which involves adding up all the direct and indirect expenses related to the home office, such as supplies, repairs, mortgage, insurance, and utilities. It's important to note that the home office deduction is closely monitored by the IRS, and it's recommended to work with a certified public accountant to ensure all deductions are correct and maximize tax advantages.

Home office requirements

Eligibility

To be eligible for the home office deduction, you must be self-employed, a business owner, or a blogger. If you are a company employee, you cannot claim this deduction. However, you could ask your employer to change your work status to an independent contractor, or set up an "accountable plan" to reimburse you for home office expenses.

Space Requirements

The space you claim as a home office must be used exclusively and regularly for business purposes. It should be designated as your principal place of business, and not double up as a guest room or space for personal activities. The space can be a room, or a separately identifiable area, and does not need to be marked off by a permanent partition.

Calculating the Deduction

The IRS offers two methods to calculate the home office deduction:

• The Simplified Method: Multiply the square footage of your office (up to 300 sq. ft.) by the standard rate of $5.
• The Actual Expense Method: Calculate the percentage of your home used for business, and then deduct that percentage of your total home expenses (e.g. maintenance, insurance, repairs, utilities, etc.) and depreciation.

Documentation

Be sure to keep documentation of your home office expenses, as the IRS requires proof of any business expense you deduct. It is also recommended to work with a certified public accountant (CPA) or tax professional to ensure your deductions are correct and to take full advantage of all available deductions.

Self-employed realtors

Home Office Deduction

If you're self-employed and work from a home office, you can claim a deduction for this expense. To qualify, your home office must be your principal place of business and used exclusively for work. This means that the space should be dedicated solely to your real estate business and not serve any personal purposes. The IRS offers two methods to calculate this deduction:

• Simplified Method: Multiply the square footage of your home office (up to 300 square feet) by a standard rate of $5 per square foot, for a maximum annual claim of $1,500.
• Actual Expense Method: Calculate and allocate all the direct and indirect expenses related to your home office, such as mortgage interest, rent, utilities, insurance, repairs, and depreciation. You can deduct a portion of these expenses based on the percentage of your home used for business.

Other Common Deductions for Self-Employed Realtors

• Mileage: You can deduct vehicle mileage when driving for business purposes, including travel between your home office and property showings, client meetings, or work-related errands.
• Desk Fees: If you pay broker desk fees, you can deduct these as a business expense. However, you cannot claim both desk fees and the home office deduction.
• Real Estate Software and Apps: Subscriptions to online tools and apps specifically for your real estate business are deductible.
• Cell Phone Bills: If you use your phone exclusively for business, you can deduct all related expenses. If you also use it for personal reasons, deduct only the portion used for business.
• Advertising and Marketing: Expenses for promoting your business, including online ads, signs, print ads, radio ads, and promotional items, are deductible.
• Professional Services: Fees for professional services such as attorneys, legal services, CPAs, and bookkeepers are typically deductible.
• Professional Development: Costs associated with networking events, conferences, seminars, and professional memberships are generally deductible.
• Health Insurance: If you don't have employer-sponsored health insurance, you can deduct your health insurance premiums and eligible medical expenses that exceed a certain percentage of your adjusted gross income.
• Self-Employment Tax: As a self-employed realtor, you pay the full self-employment tax of 15.3%. However, you can deduct half of this tax from your net income, as it represents the employer's share in a traditional employment situation.

Tax deductions

The topic of tax deductions for realtors can be complex and confusing, but it's important to understand the available options to maximize tax savings. Here are some key points to consider:

Home Office Deduction

The home office deduction is a valuable tax break for realtors, but it comes with specific requirements. The space must be exclusively used for business and designated as the principal place of work. The IRS offers two methods for calculating this deduction: the simplified option, which is $5 per square foot up to 300 square feet; and the actual expense method, which considers various costs like maintenance, insurance, repairs, utilities, and depreciation.

Vehicle Mileage and Expenses

Realtors can deduct vehicle-related expenses such as mileage, parking fees, and toll charges incurred for business purposes. The standard mileage deduction for 2022 is 58.5 cents per mile from January to June and 62.5 cents per mile from July to December. Alternatively, realtors can opt for the actual expense method, which considers the total costs of operating the vehicle.

Self-Employment Tax Deduction

As self-employed individuals, realtors are required to pay a self-employment tax of 15.3% for Medicare and Social Security. However, they can claim half of this tax as a deduction since it represents the employer's share in a traditional employment situation. This deduction is reported on Line 15 of Schedule 1.

Commissions Paid to Others

When realtors pay a sub-commission to another agent or employee to assist with a sale, this amount is fully deductible as a business expense. This deduction is reported on Line 10 of Schedule C.

Office Supplies and Rent

Office supplies, including paper, envelopes, ink, and postage, are deductible business expenses. These can be claimed separately from the home office deduction. Additionally, if a realtor rents office space outside their home, they can claim 100% of the rent cost as a necessary business expense on Line 20b of Schedule C.

Advertising and Marketing Expenses

Advertising and marketing costs, such as online ads, brochures, signs, and radio or television ads, are necessary for promoting a real estate business and are deductible on Line 8 of Schedule C. This also includes promotional items like branded pens and stress balls.

Professional Services and Memberships

Fees paid for professional services, such as attorneys, legal services, CPAs, and bookkeepers, are generally 100% deductible. Additionally, membership dues for professional organizations like the National Association of Realtors are also deductible business expenses.

Health Insurance Premiums

Self-employed realtors may be able to claim health insurance premiums as tax deductions if their business had a net profit for the year. These deductions are reported on Line 17 of Schedule 1.

Education, Training, and Networking

Costs associated with continuing education, networking events, conventions, trade shows, seminars, and courses related to the real estate industry are generally deductible. These deductions are claimed on Line 27a of Schedule C.

Cell Phone Bills

If a realtor uses their phone exclusively for business, they can fully deduct related expenses, including the phone purchase and monthly bills. If the phone is used for both personal and business purposes, they should deduct only the portion used for business.

Tax-deductible expenses

Home Office

The home office deduction is a valuable tax break for realtors who work from home. To claim this deduction, the home office must be the principal place of business and used exclusively for work. The IRS offers two methods to calculate this deduction: the simplified option, which multiplies the square footage of the office (up to 300 sq. ft.) by $5; and the actual expense method, which considers direct and indirect expenses related to the home office.

Mileage

Realtors can deduct mileage for business-related trips, such as travelling between their home office and property showings or client meetings. They can use apps to track mileage or take odometer readings. It's important to note that if the standard mileage deduction is chosen, individual vehicle expenses like gas and repairs cannot be deducted separately.

Desk Fees

If a broker charges a desk fee, this can be deducted as a business expense. However, this deduction cannot be claimed together with the home office deduction.

Real Estate Software and Apps

Subscriptions to online tools, real estate software, and apps used for the real estate business are deductible expenses.

Cell Phone Bills

If a cell phone is used exclusively for business, all related expenses, including the phone purchase and monthly bills, can be fully deducted. If the phone is also used for personal reasons, only the portion used for business can be deducted.

Advertising and Marketing

Expenses incurred for promoting the real estate business, such as online ads, signs, print ads, radio ads, and promotional items like branded pens, are deductible. Property marketing expenses for clients, such as photographers, stagers, and rental furniture, also fall under this category.

Professional Development

Expenses for networking and educational opportunities like conferences, seminars, and professional events are deductible. This includes related sign-up fees, reading materials, travel, and lodging expenses. Meals during business trips are deductible up to 50%.

Licenses and Memberships

License renewal fees and membership dues for professional organizations, such as the National Association of Realtors, are deductible expenses. However, the portion of dues that goes towards political lobbying is not deductible.

Health Insurance

If a realtor is self-employed and does not have health insurance through a spouse or employer, they can deduct 100% of their monthly health insurance premiums. If they receive a government subsidy, only the amount they pay each month can be deducted.

Commissions Paid to Others

If a realtor pays a sub-commission to another agent or employee to help with a sale, this amount is fully deductible as a business expense.

Office Supplies and Rent

Everyday office supplies like pens, paper, postage, and notepads are deductible. If a realtor rents office space outside their home, they can deduct 100% of the rent as a necessary business expense.

These are just some of the tax-deductible expenses available to realtors. It's important to consult with a tax professional or accountant to ensure that all deductions are correctly claimed and to take advantage of any additional deductions that may be applicable.

Tax filing

• Independent Contractor Status: Realtors who work for a company but are classified as independent contractors can claim the home office tax deduction. This is a significant benefit for those who work remotely and use their home office exclusively for work purposes.
• Self-Employment Tax Deduction: If you are a self-employed realtor, you must pay a self-employment tax of 15.3% for Medicare and Social Security on income above $400. However, you can claim half of this tax paid as a deduction since it represents the employer's share in a traditional employment setup.
• Home Office Deduction: If you use a part of your home exclusively and regularly as your principal place of business, you may be eligible for the home office deduction. This covers a portion of your rent, utility bills, insurance, maintenance, repairs, mortgage interest, and depreciation. You can use either the simplified method or the actual expense method to calculate this deduction.
• Mileage and Vehicle Expenses: Driving to and between properties is an integral part of a realtor's work. You can deduct mileage expenses for business-related trips, including travel between your home office and property showings or client meetings. Additionally, you can opt for the standard mileage deduction or itemize individual vehicle expenses like gas, repairs, and insurance.
• Other Common Deductions: Realtors can deduct a variety of other expenses, including desk fees, real estate software subscriptions, cell phone bills (if used exclusively for business), business cards, printing and copying costs, office supplies, advertising expenses, promotional items, parking fees, tolls, professional development fees, license and membership fees, client gifts, and health insurance premiums (if not covered by an employer or spouse).
• Documentation and Record-Keeping: It is essential to maintain thorough documentation of all deductible expenses. The IRS requires proof of any business expense you deduct, so be sure to keep receipts and track your expenses throughout the year. It is also recommended to save business receipts for at least three years after filing your taxes in case of an audit.
• Consult a Tax Professional: Tax laws and regulations can be complex and ever-changing. Consider working with a certified public accountant (CPA) or tax professional to ensure you maximize your deductions and comply with all applicable rules. They can provide personalized advice and help you navigate the intricacies of tax filing as a realtor.

Frequently asked questions