You know what is more deflating than a whoopie cushion? Paying taxes.
Maybe you have already scheduled your tax appointed. Maybe you haven’t. Look, I get it, the thought of putting together all of your expenses and adding up tax receipts is not my idea of fun either!
But my goal is to help realtors keep more of their hard-earned money away from greedy Uncle Sam! As such, I want to provide you with the 7 financial tips that can make this tax season feel just a little bit better on your wallet.
1. A Home Office Deduction
Most real estate agents are paying for an office sharing fee that provides for a desk space, supplies, office assistant, etc. As you should already know, those are all completely deductible expenses for the real estate profession. However, 2020 brought about a unique situation where that space may have had COVID-19 restrictions or where that office space may not have always been available to you.
If you had to (or just wanted to for that matter) make use of office space in your home to conduct normal professional duties, then you may have found yourself a decent-sized deduction. Last year was the year for home improvements and this applies to creating your home office space, in addition to some other deductions.
This was a tough year for a lot of people. Your tenants may have lost their employment due to the pandemic and this meant not being able to meet rent obligations. If you had lost rent or had vacant tenancy, you could use those losses against ordinary professional income. In addition, during any potential vacancy, it may have provided a good opportunity for making improvements to your properties in order to make them more attractive for future tenants. Those improvements would also count as losses against ordinary professional income.
3. COVID-19 Mandated Supplies
Real estate professionals were asked to pivot the way they conduct business on the fly and more times than possible to count. From signing new and updated forms (almost weekly), to sanitizing door knobs. However, those required adjustments cost you money out of your pocket.
4. Bonus Depreciation
As a real estate agent, you undoubtedly have some rental real estate investments. Maybe you have been putting off that new heater, stove, or flooring. Or maybe your Airbnb needs furniture upgrades? One of the best things to come out of the recent tax reform (Tax Cuts and Jobs Act), is 100% bonus depreciation. What this means is that instead of depreciating large improvements over a schedule of years, you can write off 100% of the depreciation in the first year.
You may be thinking, “yeah, but I’m not going to buy a fancy refrigerator for a college rental”. I get it. The great news is that the tax reform allows for 100% bonus depreciation for used items, as well!
So why do this? Well, because if you know that your tax bracket is going to increase next year and you might be making even more income as the housing market continues on, then bonus depreciation allows you to take some serious deductions.
5. Writing Off Your Kids
Do your kids ever come with you to work? Do you enjoy involving them in your day-to-day real estate work?
Let’s face it, kids are just plain better at technology than us. They have been holding iPads for 10 + years now. And if you kids are social media savvy (assuming they are older teens), have you considered hiring your children to run some social media campaigns or consulting for you?
You probably are already giving your kids money to buy that new video game, go to the movies, or hang out at the waterpark on those Summer days. You can make them earn it.
By paying them for their help with your real estate social media pages, you can give them some spending cash, but also give you some business deductions. It’s a win-win. And it doesn’t stop at social media, it could be work organizing files in your home office, shredding documents, or mowing the lawn on your rental properties.
6. Choosing the Appropriate Retirement Savings Plan: SEP IRA vs. Solo 401(k)
As a successful real estate agent, you understand that importance of finding tax benefits where you can get them. That’s exactly what retirement plans can do. They not only help you have automated savings for when employment income ceases at retirement, but it also serves as a reduction to current taxable income that would otherwise have gone to Uncle Sam. That being said, I’m often asked by clients about which type of retirement plan is appropriate for them.
For the self-employed, the two types of retirement plans that work best are the SEP IRA and the Solo 401(k). Both plans are similar, but with some key differences. It’s important to find the appropriate retirement plan that offers you the most tax savings!
7. Maximize your Health Savings Account
A Health Savings Account, or HSA, is combined with a high-deductible medical insurance plan offered through your employer or on your own. The HSA can be an extremely valuable and tax-efficient strategy for saving for future medical expenses. With extreme inflation in medical expenses year-over-year, this can provide a lot of value. An HSA plan is called triple tax-free because the contributions are deductible, the growth of the account is tax-deferred, and the withdrawals for qualified medical expenses are income tax-free. This is tax-efficient vehicle that cannot be passed up.
With these additional potential tax deductions, hopefully you can swing open that door to the accounting office with the confidence of being armed with more strategies. And if it’s over Zoom, well then…click that “Launch Meeting” button with more authority than ever before!
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.