Real Estate Agents as Statutory Independent Contractors & Relevant Tax Law
Real estate agents typically receive special tax protections as statutory independent contractors. In other words, they are classified as independent contractors regardless of whether they actually would be considered independent contractors under the general IRS rules. To receive this status, a real estate agent must be licensed and must be paid on the basis of their sales commissions, rather than on an hourly basis. They also must have a written contract with the business for which they work that exempts them from being treated as an employee for tax purposes. (The statutory independent contractor designation does not apply to real estate agents with regard to state taxes. They may need to pay state taxes under generally applicable rules.)
Under this system, the real estate agent will pay taxes from their own income, similar to other independent contractors. The firm for which they work will not withhold taxes from their pay. Real estate appraisers can qualify for statutory independent contractor status as well.
Lifetime Learning Credit for the Real Estate Agent License Exam
You cannot deduct the cost of preparing for and taking the exam to become a licensed real estate agent. This is because you can deduct educational costs from your taxes only if the education involves maintaining or improving your skills in your existing profession. Becoming a real estate agent involves entering a new profession, so the deduction does not apply.
However, you can apply the lifetime learning credit to this process, since passing the exam is a post-secondary education expense. The lifetime learning credit can apply to any type of education that helps you build job skills, regardless of whether the program issues a degree. Most often, the credit accounts for 20 percent of the first $10,000 of these costs in any given year, although the credit is reduced or eliminated for people who have income above certain levels. This means that you could potentially get a credit of up to $2,000 on any given tax return in a year in which you were studying for or taking the real estate agent license exam. You can use the credit for a spouse filing jointly with you or for a dependent child for whom you are claiming a tax exemption.
Deductions for Real Estate Agents
Like other businesspeople, real estate agents can deduct any ordinary and necessary expenses for their business. They may be able to deduct the costs of office supplies, insurance for their business, and rent and utilities for their business office. If they work in their home, the home office deduction may apply as well. Since real estate agents travel frequently, they benefit from mileage deductions and deductions for the costs of their transportation and accommodations when they travel outside their city. Business meals are subject to some limited and partial deductions, but business entertainment cannot be deducted. Fees for attorneys, accountants, and similar professionals may be deductible.
There are also a few more complex rules that were introduced or expanded under the Tax Cuts and Jobs Act, which went into effect in 2018. These rules include the pass-through deduction, Section 179, and first-year bonus depreciation rules, which may apply to purchases of tangible personal property for a business.
Real Estate Professionals and Mortgage Brokers
Certain people in the real estate industry may qualify as real estate professionals. They would need to work in at least one real estate business, they would need to spend at least 750 hours per year working in a real estate business or businesses, and this work must account for more than half of their time. A real estate business does not necessarily mean a business involved in buying or selling real estate. It could extend to rental businesses, construction businesses, and management entities. Mortgage brokers are specifically excluded from this classification.
There are two main tax benefits for people who qualify as real estate professionals. They are allowed to deduct all of their losses from rental real estate from their total income for the year, rather than just deducting it from other income that comes from real estate rentals or other passive investment income. Real estate professionals also are exempt from the 3.8 percent Medicare tax on unearned income, which normally would apply to most real estate investments and other passive investments. Landlords who qualify as real estate professionals thus have a much stronger financial position than other landlords.
