We had a strange year in 2020. Fortunately, it didn’t negatively affect housing demand. If there is a shining star, economically and financially speaking, it was real estate. The most challenging aspect was limited inventory, especially in more outdoor-centric areas of the country like Salt Lake City.
However, there are some changes real estate agents may have made in 2020 that should not be overlooked when it comes to bettering your financial situation for next year. In addition, with new potential tax policies in place, there are some deductions and tax strategies that you might want to implement now to take better advantage in the future.
Here are some tax strategies that would be beneficial to review now:
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. So, here is what you could potentially deduct:
· A portion of your mortgage or rent- typically divided out by the square footage used for professional use
· Utilities using the same formula as the mortgage or rent
· Repairs and maintenance necessary for the space and to create the office space
· Property taxes using the aforementioned formula
· And others as advisable by your accountant
2. Continuing Education
Perhaps you used 2020 as an opportunity to further your education for use in your real estate profession. Or, dependent on the state of your primary office, you were required to take mandatory COVID-19 related training. All of these expenses related to the training, including travel costs, would be deductible business expenses.
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. Here are some deductible expenses you want to add up as we continue through the 2021 financial year:
· Supplies of masks
· Cleaning supplies
· Related supplies for staff
· Purchased software (Docusign or other, Canva premier for additional marketing, an upgraded Adobe version for fillable PDFs, etc.)
4. 1031 Exchanges
Up until now we have been talking about deductions and strategies that could still apply on your 2020 tax returns, however, here we are talking about potential strategies that apply under a new presidential administration and future tax changes.
As a successful real estate agent, you likely have investment properties of your own. And, although the new tax proposals have been very loose around the language of 1031 exchanges, it has referenced a desire to do away with the tax favorable policies for like-kind real estate exchanges. It is also thought that any such changes would likely apply to the 2022 tax year. So, this leaves room to have a discussion with both your CERTIFIED FINANCIAL PLANNER™ and your accountant about making a 1031 exchange of your investment property now to preserve the favorable tax treatment.
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.
There are many opportunities for real estate agents to take advantage of financial strategies and tax deductions that were brought about from COVID-19 and these are just some of the considerations that could help your financial situation going into next year.
For additional deductions and strategies, speak with your accountant or feel free to connect with me
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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.