Tax Deductions for Real Estate Professionals Maureen McEnroe, CFA Real Estate Broker Cell 914 588 1873 Objective • To educate and prepare Real Estate Professionals to identify and maximize deductions and maintain defensible records of their deductions What’s in your pocket? It is not what you make but what you get to keep that matters This Course will guide you through what items are tax deductible, what records you need to keep, and how to maximize your deductions Introduction •Thanks you for giving me the opportunity to teach the Tax Deductions for Real Estate Professionals /record keeping class I want to preface this with the fact that I am not an Accountant, I have MBA and I am a Chartered Financial Analyst My background in Business but business planning and analysis is my forte Part of my strength as an analyst is in forecasting and planning • Warning this class was designed by a nonaccountant There are some complex concepts that I have tried to simplify After having consulted with tax professionals, tax publications, IRS documents and Publications, this class is an overview of the allowable and not allowable deductions Real Estate Professionals can utilize to legally lower their tax burden and put more money in their pockets • As we all know it is not what we make but what we keep that truly matters As an independent contractor, your Brokerage will give you a 1099 to represent the revenue side of the equation • At the end of this class, you should be able to set up the necessary records and documents to monitor and classify the various deductions available to you • The IRS indicates: Licensed Real Estate Agents - Real Estate Tax Tips • Most real estate professionals operate their business as a sole proprietorship This means that you are not someone's employee, you haven't formed a partnership with anyone, and you have not incorporated your business • Statutory Nonemployees • Licensed Real Estate agents are statutory nonemployees and are treated as self-employed for all Federal tax purposes, including income and employment taxes, if: • Substantially all payments for their services as real estate agents are directly related to sales or other output, rather than to the number of hours worked • Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes • This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output • This means you are essentially Independent Contractors • IRS Publication 334 states: • Real Estate dealer You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales Rent you receive from real estate held for sale to customers is subject to SE tax However, rent you receive from real estate held for speculation or investment is not subject to SE tax The Value of Tax Deductions • As a general rule of thumb, for agents/brokers earning up to $100,000 per year, every dollar deducted from your taxable income will save you roughly $0.50 in taxes This assumes a 28% federal income tax, 15.3% in self-employment taxes and an average of 6% state income taxes In Rockland County we have a higher local tax so our savings are a bit higher • For those lucky agents making over $100,000 per year, your deductions are worth a bit less than $0.50 on the dollar but still approaching $0.40 or so True or False • 1) Most Real Estate Professionals are LLCs • 2) The IRS tells us when we have missed a deduction • 3) Real Estate Professionals are Statutory Nonemployees • What percentage of Self Employment taxes are deductible? • 1) 15.3% • 3) 92.35% 2) 7.65% 4) 14.1% • Standard mileage deduction for 2015 is? • 1) $0.575 2)$0.57 • 3) $0.565 4) $0.56 Yes or No • 1) Is there an upper limit in deductions? • 2) Can you deduct more than you earn? • 3) Can you elect to file taxes annually? • 4) Can you deduct mileage and other car expenses? IRS Code 162 Deductibility Rules Does Not include? • 1) Ordinary and necessary • 2) Directly related to your business • 3) Limited to domestic expenses • 4) Reasonable amount Who can deduct Office Expenses? • 1) Agents that own their home • 2) Agents that rent their homes Which is a legitimate deduction? • 1) Realtor Magazine subscriptions • 2) Trip to Las Vegas where you look at listing • 3) Trip to NYC for a Foreclosure conference • 4) Computer purchased for your business Insurance Deductions Allowed? • 1) Entire cost of Homeowners Insurance • 2) E&O Insurance paid by the Broker • 3) E&O insurance paid by the Agent • 4) Entire cost of Health Insurance How much Can I Deduct? • 1) $100 restaurant gift certificate given to a buyer at a closing • 2) $250 monthly Trulia premier agent fee • 3) $144 per year eKey expenses • 4) $150 Business lunch for myself and clients True or False • 1) I can log months of auto expenses and multiply that by to satisfy the IRS • 2) I can choose the information in Include on my tax deduction receipts • 3) I should wait until the year ends to start putting my records and expense receipts together Acceptable Home Offices Include? • 1) Separate room used for nothing but business • 2) Guest room where I keep my desk • 3) Computer set up on desk in kitchen • 4) Rented office where I conduct my business and meet clients Why Independent Contractors have to pay Self Employment Taxes? • 1) To be fair to employees • 2) To enable IC to participate in Medicare and Social Security • 3) Because the IRS is greedy • 4) To provide another deduction Which Form helps Independent Contractors Estimate their Tax Burden? • 1) 1098 2)1099 • 3) 1040ES 4) Schedule SE When are estimates Taxes Due? • 1) 4/15, 6/15, 9/15, 1/15 • 2) 3/15, 6/15, 9/15, 12/15 • 3) 4/15 7/15, 10/15, 2/15 • 4) 4/15, 7/15, 10/15, 1/15 How can and S Corp Lower SE Taxes? • 1) Allows S Corp to take additional deductions • 2) S Corps can pass through income • 3) Franchise fees are low • 4) Allows you to split salaries and dividends