Guide to Tax Basics for Real Estate Brokers

The federal income tax law recognizes that you must spend money to make money. Virtually every real estate agent or broker, however small his or her business, incurs some expenses. Even an agent or broker who works from home must pay for business driving and insurance. Let's take a look at the basics for real estate brokers taxes, as well as some valuable deductions that may be helpful during tax time.

Real Estate Brokers Taxes: A Basic Guide for What You Need to Know

If you are a sole proprietor (or owner of a one-person LLC taxed as a sole proprietorship), you are not legally required to pay tax on every dollar your real estate sales business takes in (your gross business income). Instead, you owe tax only on the amount left over after your deductible business expenses are subtracted from your gross income (this remaining amount is called your net profit).

Although some tax deduction calculations can get a bit complicated, the basic math is simple: the more deductions you take, the lower your net profit will be and the less tax you will have to pay.

Example: Karen, a sole proprietor real estate broker, earned $100,000 in commissions this year. Fortunately, she doesn't have to pay income tax on the entire $100,000—her gross business income. Instead, she can deduct from her gross income various business expenses, including a $10,000 office rental deduction and a $5,000 deduction for insurance. These and her other expenses amount to $20,000. She can deduct the $20,000 from her $100,000 gross income to arrive at her net profit: $80,000. She pays income tax only on this net profit amount.

The principle is the same if your business is a partnership, limited liability company or S corporation: Business expenses are deducted from the entity's profits to determine the entity's net profit for the year, which is passed through the entity to the owners' individual tax returns.

Example: Assume that Karen is a member of a three-owner real estate brokerage organized as a limited liability company (LLC), and is entitled to one-third of the LLC's income. She doesn't pay tax on the gross income the LLC receives, only on her portion of its net income after expenses are deducted. This year, the LLC earned $400,000 and had $100,000 in expenses. She pays tax on one-third of the LLC's $300,000 net profit.

If your business is organized as a regular "C" corporation, it too pays tax only on its net profits.

Real estate agents and brokers can deduct three broad categories of business expenses:

• start-up expenses
• operating expenses
• capital expenses