Overlooked tax deductions for real estate professionals
Real Estate Tax Talk
BY STEPHEN FISHMAN
Every year, thousands of real estate professionals pay more tax than they need
to because they fail to take all the deductions to which they are legally entitled.
The Internal Revenue Service will never complain if you don't claim all the
deductions you can. It's up to you and your tax preparer to figure out what you
can deduct, keep proper records, and claim deductions on your return.
Every dollar in deductions you fail to take can cost you 40-50 cents in extra taxes
-- money the IRS is happy to keep.
Two of the most often overlooked deductible expenses arise from doing business
from your home.
"Almost any real
Probably the No. 1 deduction real estate pros miss is the home-office deduction.
Many erroneously believe they don't or can't qualify for this deduction. Untrue.
Almost any real estate agent or broker who works as an independent contractor
can qualify for the home-office deduction.
This is the case even if you work out of an outside sales office and/or spend most
of your time on the road and at the properties you're trying to sell.
In addition, many real estate pros are afraid to take this deduction because they
have heard that it is a red flag for an IRS audit. The IRS says this isn't the case.
The home-office deduction may have been an IRS audit flag over a decade ago,
when the rules for claiming it were more restrictive than they are now. But there
is no reason to believe that claiming it today significantly increases your chances
for an audit.
It's important to understand that you don't have to spend all of your work time in
your home office or even perform your most important business activities there to
qualify for the home-office deduction.
You can qualify for this deduction if you have a home office that you use
exclusively and regularly for administrative or management activities for your real
estate business, and you have no other fixed location where you regularly
perform such activities.
Administrative and management activities can include, but are not limited to:
keeping books and records;
setting up appointments;
maintaining client databases or contact lists;
reviewing real estate publications; or
engaging in real estate continuing-education activities.
This means that you can qualify for the home-office deduction even though your
home office is not where you generate most of your income. It's sufficient that
you regularly use it for the administrative and management activities you
regularly perform for your real estate business.
As long as you have no other fixed location where you regularly do these
activities -- for example, a desk you use at your brokerage office -- you'll get the
deduction. Moreover, you can qualify for the deduction even if you could conduct
administrative or management activities at an outside office but choose to use
your home office for those activities instead.
The home-office deduction is particularly valuable for renters because it allows
you to deduct a portion of your rent. The amount you can deduct is based on the
percentage of your home that is used for your home office.
If you own your home, you have the option of deducting the home-office
percentage of your mortgage interest and property tax payments as part of your
home-office deduction. Since this is a business deduction, not a personal
deduction, it reduces the amount of your business income subject to selfemployment taxes, as well as reducing your income taxes.
The self-employment tax is 15.3 percent, so you can save $153 in selfemployment taxes for every $1,000 in mortgage interest and property taxes you
deduct as part of your home-office deduction. If you do this, you may not deduct
this amount on your Schedule A (you can't deduct the same item twice).
You can also deduct the home-office percentage you pay for utilities, home
maintenance, insurance, and condo association fees.
There is one catch to the home-office deduction: You cannot deduct more than
the net profit you earn from your business. If your real estate business earns very
little or loses money, this limitation could prevent you from deducting part or even
all of your home-office expenses in the current year.
If your deductions exceed your profits, you can deduct the excess in the following
year and in each succeeding year until you deduct the entire amount.
There is no limit on how far into the future you can deduct these expenses; you
can claim them, even if you no longer live in the home where they were incurred.
So, whether or not your real estate business is making money, you should keep
track of your home-office expenses and claim the deduction on your tax return.
Office expenses in the home
Many real estate pros believe that they can't deduct any expenses they incur
while working at home unless they qualify for the home-office deduction. This is a
myth that has cost many real estate pros valuable deductions.
Even if you don't qualify for or take the home-office deduction, you can still take
tax deductions for expenses you incur while doing business at home. These are
expenses that arise from the fact that you are doing business, not from the use of
the home itself. These include:
Telephone expenses. You can't deduct the basic cost of a single telephone line
into your home, but you can deduct the cost of long-distance business calls and
special phone services that you use for your business (such as call waiting or a
message center). You can also deduct the entire cost of a second phone line that
you use just for business, including a mobile phone.
Business equipment and furniture. The cost of office furniture, copiers, fax
machines, and other personal property you use for your business and keep at
home is deductible, whether or not you qualify for the home-office deduction. If
you purchase these items specifically for your real estate business, you can
expense them (deduct them in one year) under Internal Revenue Code Section
179, or depreciate them over several years.
If you use the property for both business and personal reasons, the IRS requires
you to keep records showing when the item was used for business or personal
reasons -- for example, a diary or log with the dates, times and reasons the item
Supplies. Supplies for your real estate business are currently deductible as an
operating expense if they have a useful life of less than one year. Otherwise, you
must depreciate them or expense them under Section 179.
Stephen Fishman is a tax expert, attorney and author who has published 18
books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers
and Consultants," "Deduct It," "Working as an Independent Contractor," and
"Working with Independent Contractors."