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- October 10, 2024
Tax Planning Strategies for Real Estate Agents
Taxation is a part of our lives. As working professionals, we all have to pay taxes. There is no way around it. But that doesn’t mean you cannot optimize and bring down your tax burden. If you are a real estate agent looking for tax planning strategies, you are at the right place. In this blog, we will share some steps that can help minimize your tax burden and stay compliant with IRS guidelines. So, let’s begin.
How can Real Estate Agents Minimize their Tax Burden?
Pick Your Business Structure
If you are just starting your business, make sure you pick the right business structure. Most of the real estate agents love to operate as sole proprietors. But if you form an LLC or an S-Corp, you can get significant tax benefits. Apart from tax benefits, an LLC also offers you protection from any potential liabilities in the future and allows pass-through taxation. An S-Corp can reduce self-employment taxes by allowing you to pay yourself a reasonable salary and take additional profits as distributions. But make sure you consult with professionals like the ones at the Crown Globe before finalizing your business structure,
Claim Maximum Tax Deductions
- Deduct a portion of your home expenses if you have a dedicated home office.
- Deduct mileage or actual expenses like gas, maintenance, and insurance if you use your car for business.
- Deduct costs for flyers, online ads, and other marketing efforts.
- Deduct fees for continuing education, licensing, and memberships in professional organizations.
Maintain Detailed Records
This is the most ignored step of tax planning for real estate agents. Do not make the same mistake. Make sure you keep a detailed record of every income and expense. You can either do it via accounting software or, even better, hire a bookkeeping expert from agencies like CROWNGLOBE. Good records ensure you can substantiate your deductions if the IRS audits you.
Take Advantage of Depreciation
Depreciation allows you to deduct the cost of business assets over time. If you are a real estate agent, you can claim depreciation on office furniture, computers, and vehicles. If you are looking for faster depreciation, you can use the Modified Accelerated Cost Recovery System (MACRS). You can also take advantage of Section 179 expensing. This will allow you to deduct the full cost of your qualifying assets in the year your purchased them.
Plan for Quarterly Taxes
Paying bills at the year-end is tough. You get a large tax bill at the end of the year. Better option? You can plan for quarterly taxes. This will divide your big tax bill into smaller ones. Make sure you calculate your estimated tax payments based on your income and deductions. You can use IRS Form 1040-ES to make payments. Quarterly tax payments also help you avoid any penalties and interests.
Take Benefits of Retirement Accounts
Contribute to retirement accounts to reduce taxable income. Options include:
- SEP-IRA: Contribute up to 25% of your net earnings, up to a limit.
- Solo 401(k): Contribute as both employer and employee, allowing for higher contribution limits.
- Traditional IRA: Contributions may be deductible, reducing your taxable income.
Health Insurance Deduction
If you’re self-employed, you can deduct health insurance premiums for yourself, your spouse, and your dependents. This deduction applies whether you itemize deductions or not. It reduces your adjusted gross income, lowering your overall tax liability.
Utilize Section 199A Deduction
The Qualified Business Income (QBI) deduction allows you to deduct up to 20% of your business income. To qualify, you must operate as a sole proprietor, partnership, S-Corp, or LLC. Your taxable income must be below certain thresholds. This deduction can significantly reduce your tax bill.
Hire Family Members
Hiring family members can provide tax benefits. Pay a reasonable salary for work performed, and you may be able to shift income to a lower tax bracket. Additionally, if your child is under 18, their wages are not subject to Social Security and Medicare taxes.
Charitable Contributions
Deduct charitable contributions to qualified organizations. Donations can include money, property, or stock. Keep receipts and acknowledgment letters from the charities. If you donate property, obtain an appraisal for items worth more than $5,000.
Plan for Capital Gains and Losses
Real estate agents often deal with investments. Understand how capital gains and losses affect your taxes. Short-term capital gains (assets held for one year or less) are taxed at ordinary income rates. Long-term capital gains (assets held for more than one year) are taxed at lower rates. Offset gains with losses to minimize your tax liability.
Education and Training Expenses
You can make deductions for any expenses that you make towards maintaining or improving your skills. This could be anything like buying books, enrolling in a course, or joining any seminars. These expenses are fully deductible if they are a match for your current profession. But here, you will also have to maintain accurate records.
Utilize Tax-Deferred Exchanges
Under Section 1031 exchanges, you can defer capital gains taxes on whatever gains you have made by selling an investment property. But the only condition is that you have to reinvest the proceedings in a similar property. The benefit here is that you can grow your real estate investments and do not have to pay taxes on that. There are certain guidelines from the IRS that you have to follow for this deferral.
Consider a Health Savings Account (HSA)
If you have a high-deductible health plan, contribute to an HSA. These contributions are tax-deductible. Similarly, withdrawals for qualified medical expenses are tax-free, too. This account grows tax-deferred, and unused funds roll over from year to year.
Review Tax Law Changes
The main problem with tax planning for any professional is the changing tax laws. IRS constantly upgrades these laws, and hence, a lot of taxpayers make mistakes while filing their returns. So make sure you stay updated about each tax update. But to be honest, this is a very complex process. The good option is to hire a tax professional like the one at CROWNGLOBE and relax. These professionals constantly monitor any change in the tax law, and hence, they can offer you better tax planning. This helps you stay compliant and can save you more taxes, too.
Wrapping Up
Effective tax planning requires a proactive approach. We hope this quick guide can help you with this. There are multiple options to optimize your taxes. However, it’s important that you stay compliant with the IRS guidelines during the process. If you have any questions related to your tax planning, feel free to reach out. Our experts at CROWNGLOBE specialize in tax planning for Real Estate Agents. We can help you out with all your taxation woes. So don’t hesitate; we are always here to assist.
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