Real estate agents enjoy unique tax benefits as statutory independent contractors. This means that they are classified as independent contractors, regardless of whether they meet the general IRS criteria. To obtain this status, a real estate agent must be licensed and earn their income through sales commissions, rather than an hourly wage. Additionally, they must have a written contract with their employer, explicitly stating that they are exempt from being treated as an employee for tax purposes. (It’s important to note that the statutory independent contractor classification does not apply to state taxes; real estate agents may still be subject to state tax regulations.)
Under this arrangement, real estate agents are responsible for paying their own taxes, similar to other independent contractors. Their employers do not withhold taxes from their paychecks. It’s worth mentioning that real estate appraisers can also qualify for statutory independent contractor status.
Lifetime Learning Credit for Real Estate Agent License Exams
Unfortunately, the cost of preparing for and taking the exam to become a licensed real estate agent is not deductible. The IRS only allows deductions for educational expenses if they pertain to maintaining or improving skills in an existing profession. Since becoming a real estate agent involves entering a new profession, this deduction does not apply.
However, there is some good news! You can utilize the lifetime learning credit for this process, as passing the exam qualifies as a post-secondary education expense. The lifetime learning credit covers any type of education that helps build job skills, regardless of whether it leads to a degree. Generally, this credit accounts for 20 percent of the first $10,000 in costs per year, though it may be reduced or eliminated for higher-income individuals. Thus, you could potentially claim up to $2,000 in credits on your tax return during a year when you were studying for or taking the real estate agent license exam. You can also use this credit if you file jointly with your spouse or claim a dependent child.
Deductions for Real Estate Agents
Similar to other business professionals, real estate agents can deduct ordinary and necessary expenses related to their business. This includes office supplies, business insurance, rent and utilities for their office space, and potentially even a home office deduction if they work from home. As real estate agents often travel extensively, they can benefit from mileage deductions and deductions for transportation and accommodation expenses when traveling outside their city. While there are limited and partial deductions for business meals, business entertainment expenses cannot be deducted. Furthermore, fees paid to attorneys, accountants, and similar professionals may also be deductible.
It’s important to note that the Tax Cuts and Jobs Act, effective since 2018, introduced several complex rules. These include the pass-through deduction, Section 179, and first-year bonus depreciation rules, which could potentially apply to tangible personal property purchases for business purposes.
Real Estate Professionals and Mortgage Brokers
Certain individuals in the real estate industry may qualify as real estate professionals. To do so, they must work in at least one real estate business, spend a minimum of 750 hours per year working in real estate, and have this work account for over half of their total hours. A real estate business can encompass not only buying or selling properties but also rental businesses, construction businesses, and management entities. However, mortgage brokers are expressly excluded from this classification.
Qualifying as a real estate professional offers two significant tax benefits. Firstly, these professionals can deduct all rental real estate losses from their overall income, rather than just offsetting them against income from real estate rentals or other passive investments. Secondly, real estate professionals are exempt from the 3.8 percent Medicare tax on unearned income, which typically applies to most real estate and passive investments. As a result, landlords who qualify as real estate professionals enjoy a much stronger financial position compared to other landlords.
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