Are Real Estate Commissions Tax Deductible: The Complete Guide for 2024

Whether a self-employed real estate agent or working in a firm, you will be paid a commission for your work. Many real estate agents pay many taxes without knowing the deductions available. 

The Internal Revenue Service (IRS) permits certain deductions from your commissions for expenses incurred for business purposes. 

This blog delves deeper into the deductions available for real estate agents. Engage a professional to calculate deductions in case you do not have sufficient time, as these could save you thousands of dollars in taxes.

What constitutes an average salary for a real estate agent?

The earnings of a real estate agent hinge on various factors such as the geographical area of operation, market conditions, and individual proficiency in client acquisition and deal closure. According to Payscale data, the median real estate salary stands at $46,129.

It's important to note that this figure amalgamates salaries nationwide and encompasses all experience levels. For a more nuanced understanding of potential career earnings, consider the average pay based on different experience tiers:

• Entry-Level (0-5 years): $43,000 annually
• Mid-Career (5-10 years): $59,000 annually
• Experienced (10-20 years): $62,000 annually
• Late Career (more than 20 years): $75,000 annually

What do real estate commission rates entail?

In numerous states, a prevalent commission rate is 6% of the property's sales price. For instance, if a home is sold for $500,000, the corresponding commission would amount to $30,000. However, the actual commission rate can fluctuate, potentially being higher or lower, contingent on factors such as the property's value and the overall health of the real estate market.

It's crucial to remember the primary tenet of real estate sales: virtually everything is open to negotiation. There is no fixed legal standard for the amount or rate of real estate commissions, as attempting to establish one would violate federal antitrust laws. Real estate agent commissions are individually determined by each broker, often subject to negotiation between the seller and the broker.

Traditionally, the seller bears the burden of the real estate agent commission, although this arrangement is negotiable. Occasionally, the commission is shared between the buyer and seller. The precise commission amount must be explicitly outlined in a written listing agreement. Payment is typically made to the agent's broker upon the close of escrow, with the broker then remunerating the agent.

In situations where a single agent represents both the buyer and seller, they receive the entire commission. Conversely, when the buyer and seller have their own respective agents, the real estate agent commission is divided between them and their respective brokers.

Top tax deductions for real estate agents

Here is a list of deductions allowed from a real estate agent’s tax payments:

1. Home office 

When you use a part of your home for business purposes, you can claim a home office deduction. For this, you have to satisfy two conditions: 

• You must regularly and exclusively use your home for business. 
• Your home should be the only primary place of business. 

You can deduct rent, insurance, utility bills, maintenance, repairs, depreciation, mortgage interest, etc.

Deductions can be computed in two ways: actual expenses or the simplified method. In the simplified method, the home office deduction for the year 2023 is $5 per square foot of your home office, up to 300 square feet. 

The IRS follows strict procedures and allows deductions only if the criteria mentioned are satisfied.

2. Local taxes

You can deduct the property tax and other state taxes that you pay on your personal property. The total amount of such taxes eligible for deduction is limited to $10,000 in a year. Any other local taxes that fall under Lines 5-6 of Section A are also deductible.

3. Self-employment deduction

A self-employment tax at the rate of 15.3% is applicable on commission income of more than $400. Half of this tax can be claimed as self-employment tax deductions

While submitting your tax returns, this should be mentioned under Line 15 on Schedule 1 so as to claim deductions.

4. Commission payments to others

Real estate agents employ sub-agents to help them in their work. In such cases, they pay commissions to these agents for the work done. Commissions paid to agents who work under real estate agents are fully deductible from the taxable amount.

The sub-commission amount paid must be mentioned in Line 10 of Schedule C to claim this deduction. This amount can bring in huge deductions and tax savings to real estate agents.

5. Car deductions

The work of real estate agents entails a lot of travel to the work site, client’s place, office, etc. Since travel is a part of work, mileage traveled can be claimed as deductions. This can contribute to a huge amount of tax savings since the more miles traveled means the more deductions. For the year 2023, the standard deduction is $0.655 per mile driven for work. This should be declared in Line 9 of Schedule C to claim deduction. 

Another method to claim deductions is the actual expense method. This applies when miles traveled are much less and expenses on car payments are more. In this case, actual receipts should be submitted to claim deductions.

6. Advertisement

Marketing and advertisements are much needed to promote your business. IRS allows the deduction of reasonable advertisement expenses such as brochures, signage, photography, online advertisements, media advertising, etc. 

Advertisement expenses should be claimed on Line 8 of Schedule C while filing tax returns. 

7. Professional memberships

There are many professional groups related to the real estate business. Many real estate agents enroll themselves in such unions, trade associations, etc., for which a membership fee is payable. Since this is directly related to the work of a real estate agent, such fees are fully deductible from the tax due.

Real estate agents have to declare such expenses under Line 27a of Schedule C in order to be eligible. Membership license renewal fees and other such expenses are also included under this head.

8. Health insurance premium

Real estate agents who are self-employed can claim deductions for health insurance premiums paid. Health expenses that exceed 7.5% of their adjusted gross income are also eligible to be deducted. 

Premiums paid for your family are also deductible. In the case of working under an employer, such expenses are not deductible if there is an employer-sponsored insurance plan. Medical, dental, and other long-term coverage are included in this head. To claim this deduction, you should declare the amount of premium paid under Line 17 of Schedule 1. 

9. Donations

IRS grants deductions for charitable donations made. Such deductions can be claimed under Lines 11-13 of Schedule A. In case you have made a non-cash donation, deductions can be claimed for the fair market value of the item subject to valuation.

Deductions up to 60% of adjusted gross income are eligible for donations made in cash. Regarding payments to charity event tickets, the difference between the amount you paid and the fair market value can be claimed as deductions.

10. Office supplies and equipment 

Real estate agents can claim office-related expenses on stationery, photocopying, paper clips, inks, cartridges, staplers, postage, and envelopes. These should be declared under Line 18 of Schedule C. 

Expenses on equipment like landline telephones, printers, computers, fax machines, etc. are also deductible. If it is a mobile phone, only calls related to business purposes can be deducted.

11. Software and tools

Any software or other tools purchased for business purposes can also be deducted from commissions earned for tax purposes. These are used for facilitating the easy organization of the business and so are fully deductible. 

12. Meals

You may be dining with clients, colleagues, or other business-related people or may be eating out while traveling on account of business. Expenses on meals in such situations are fully deductible as per IRS rules and need to be shown under Line 24b of Schedule C. 

13. Trade shows and seminars

Any registration fee paid for seminars, training courses, trade shows, etc., is fully deductible. They should be shown under Line 27a of Schedule C. These seminars should enrich knowledge as part of business requirements and not enhance the agent’s personal career. 

Example of real state agent annual income from commissions after tax deductions 

Let's consider the example of a real estate agent named Sarah. Sarah works as an independent contractor and earns income through commissions from the sale and purchase of real estate properties.

Sarah's Annual Income and Commission Rates

• Annual Gross Commission Income: $100,000
• Commission Rate: 3% of the property value
• Total Real Estate Transactions: $3,333,333.33 (calculated as $100,000 / 0.03)

Annual Expenses

1. Marketing Expenses: $5,000
2. Transportation Expenses (Car Mileage, Gas, Maintenance): $4,000
3. Office Supplies: $1,500
4. Professional Memberships and Licenses: $1,200
5. Meals and Entertainment (related to business): $1,000
6. Home Office Expenses (utilities, insurance, etc.): $2,000
7. Continuing Education Courses: $500
8. Health Insurance Premiums (self-employed health insurance deduction): $3,000

Total Annual Expenses: $18,200

Taxable Income Calculation:

• Gross Commission Income: $100,000
• Minus Total Expenses: -$18,200
• Taxable Income: $81,800

Tax Liability Calculation:

• Assuming a 22% tax rate for simplicity:
• Taxable Income * Tax Rate: $81,800 * 0.22 = $17,996

Net Income After Taxes:

• Gross Commission Income: $100,000
• Minus Total Expenses: -$18,200
• Minus Taxes: -$17,996
• Net Income After Taxes: $63,804

In this example, Sarah's annual income is $100,000, but after deducting business-related expenses, her taxable income is reduced, resulting in lower tax liability. Keep in mind that tax laws and rates may vary, and real estate agents should consult with a tax professional for accurate advice based on their specific circumstances.

Conclusion

We have listed several deductions allowed by the IRS. While claiming, make sure that all these expenses are in relation to your business only. Understand the deductions you are eligible for and maintain receipts in case of need. 

If you need more assistance, you may contact a professional tax practitioner who can help you identify the right kind of deductions from your commission earnings.

FAQs about real estate agent taxes

1. Can real estate agents deduct the cost of clothing for work purposes?

Generally, clothing expenses are not deductible unless they are required for the job and not suitable for everyday wear. Clothing with a company logo or specific uniform may be deductible, but standard business attire typically is not.

2. Are real estate agent fees tax-deductible?

Yes, fees paid to register as a real estate agent and continuing education costs are generally tax-deductible.

3. Can I claim my car expenses as a deduction as a real estate agent?

Yes, real estate agents can deduct car-related expenses, including gas and wear and tear, based on the miles traveled for work. The IRS provides a standard mileage rate for business travel.

4. How are real estate agent commissions taxed?

Commissions are taxed as self-employment income. Real estate agents owe 15.3% self-employment tax, in addition to income tax based on their tax bracket. However, if you're a single-member LLC taxed as an S Corp, a portion of your income may not be subject to the 15.3% self-employment tax.  To optimize tax deductions and financial management within your real estate activities, opening a separate business bank account is crucial. This not only simplifies tracking of commission payments and business expenses but also enhances the accuracy of tax filings. A separate account ensures clear delineation of business transactions, making it easier to identify deductible expenses, such as commissions paid to sub-agents, thereby potentially increasing tax savings for real estate agents.

5. What percentage of income should real estate agents set aside for taxes?

The tax rate depends on taxable income, with rates ranging from 10% to 37%. Real estate agents should set aside funds for both self-employment tax (15.3%) and income tax. An accountant can help create a personalized tax plan.

6. How do real estate agents file and pay taxes?

Real estate agents, often taxed as sole proprietors or S Corps, file taxes using Form 1040 or Form 1120S, respectively. They owe self-employment tax, must pay estimated quarterly taxes, and can claim business-related deductions. Accountants or tax software can facilitate the filing process.