1. Not having a system to collect their deductions.

Real estate agents hustle more than almost any other profession.  In the morning, they might work on promotional materials in the office, show houses to prospective buyers in the afternoon, and attend networking events in the evening.  That’s a full day with many potential business deductions.

First, there’s lots of mileage.  Tracking mileage no longer involves paper logs, which always seemed to end up washed out from going through the laundry.  A GPS-aware app on your phone can track your every trip.

Second, concentrate business expenses on one or two credit cards used exclusively for business.  Spreading purchases over multiple business and personal cards makes tax time a nightmare.  With only one or two sources to review, getting ready for your tax returns becomes a breeze.

Finally, keep your business receipts in one file folder.  I scan my receipts any time I accumulate a few, but scanning might be too much bother for you.  Put them all in one manila folder.  Maybe scan them in a batch later – or not.  Having them in one place means, at tax time, you aren’t looking in drawers all over the house for that $500 computer purchase from Best Buy.

  1. Not considering business entity.

Are you operating as a sole proprietor?  That may be just fine for you if you’re just getting started in real estate.  However, once you approach $100K of gross commissions, you should consider other alternatives.  

For example, an S corporation could save you some money on Medicare taxes.  But there are a lot of things to consider in this decision.  You’ll have the hassle of payroll, payroll taxes, and taking a salary.  That’s a lot of paperwork.

The new tax law 20% pass through deduction may be limited under an S corporation.  On the other hand, it might be increased depending on your personal (and spouse’s) tax situation.  There’s a right answer for you.  Pick an excellent tax advisor, who specializes in entity selection issues.

  1. Not considering pension plan alternatives.

There are three main pension plan alternatives fro real estate agents.  Many agents get stuck into SEP plans, where you can contribute up to 25% of your profits.  However, that may not be a great choice anymore.  

If you’re working hard at tax planning, getting your taxable profit down to a low number limits your pension contribution.  You can contribute and deduct a larger pension contribution using a solo 401(k) plan.  The solo 401(k) plan has become the “go to” plan for real estate agents, because you can structure a tax efficient entity and still save a lot of money for retirement.

Finally, if you’re really killing it year after year, the old style defined benefit pension plans may be for you.  These plans give you the largest possible pension contribution, but lock you into large contributions over a number of years.  These plans aren’t that popular, but may fit some circumstances, such as an agent with a high income spouse.

As a real estate agent, you already know the unique business and personal challenges of the business.  Select a tax advisor, who knows the unique tax challenges of the business and can structure a tax plan to meet your needs – such as staying out of jail.

Thanks for reading!

Frank Stitely, CPA