BRR has a variety of resources for our REALTOR® Members to help them prepare for their financial future. This content below was provided by BRR’s accounting firm Harris CPAs. It is provided here for educational and informational purposes only. It is not intended to be nor, should it be used as a substitute for tax advice regarding any specific circumstance. Every fact and situation is different and you should consult with your personal accountant before acting upon the matters discussed in this post.
Tax Tips Every Real Estate Agent Needs to Know In Their First Year
Provided to BRR by Harris CPAs; Written by Margaret Flowers, CPA and Cheryl Row
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Real estate agents are generally paid commissions on the sales of property and receive a 1099 at the end of the year. This means that now you are considered self- employed for tax purposes and you should approach this like any business venture. This means that it is now time to keep track of your income and expenses to track the monetary success (and failures) of your new business.
Having a good system for tracking can help to ensure that you are not missing out on deductions against your income and therefore lower the amount of taxes that you pay on your income.
What kind of expenses can I deduct?
You can now deduct expenditures related to your business activities. This includes keeping track of your mileage for both business and personal use. There are several apps available to help you to track your mileage and these logs that are created will help to calculate your mileage and business use percentage. You can either deduct business mileage times the IRS authorized rate or a percentage of your actual expenses such as fuel, insurance, interest on your automobile loan, repairs and maintenance. This percentage is based on the business mileage in relation to total mileage for the year.
You can also deduct the cost of any supplies you use in your business. Do you use your computer or smartphone to post your listings on the MLS, or to scour listings for your purchasing clients? The cost of the phone or computer is deductible as well as the internet service you pay for. If you buy gifts for your clients or take them to eat while you are showing properties, these items are deductible against your income.
When you receive your commission income from your broker, many times they will withhold an amount for Errors and Omission (E&O) Insurance and other costs from your portion. It is important to ask your broker if these amounts are deducted from your income on your 1099 or if they are included on the 1099. If they are included, you can deduct them against your income.
The amounts you pay to renew your license or any organization dues are also deductible. (Note from BRR: Please see your dues invoice for specific deductibility rules.)
Do you have an office in your home that is reserved exclusively for your business activities? If so, you can deduct a portion of the mortgage interest, rent, property taxes, insurance, utilities and repairs based on the square footage of your office to the total square footage of the home.
If you purchase items for your business using a credit card, we recommend that you use one solely for business expenses. This will help keep your business expenses separate from your personal expenses and any interest paid on the credit card will also be deductible. If you mix business and personal, you cannot deduct the interest.
How much should I put away for taxes?
Since you are now considered self-employed, you will pay self-employment taxes of 15.3% of your net income. This is after your expenses. You will also pay income taxes and the amount will depend on what other income your household shows. For 2019, a single taxpayer with taxable income below $39,475 will pay 12%.
Now that you are self-employed, it is important to keep track of your financial situation as banks will ask for different documentation than in the past when obtaining funding.
There are several accounting software options available for a relatively low cost that are fairly easy to use. Also, using a bookkeeper to help keep track of your income and expenses will help to free up your time to focus on selling properties.
This content was provided by BRR’s accounting firm Harris CPAs. It is provided here for educational and informational purposes only. It is not intended to be nor, should it be used as a substitute for tax advice regarding any specific circumstance. Every fact and situation is different and you should consult with your personal accountant before acting upon the matters discussed in this post.
Deferring Capital Gains Through a 1031 Exchange
Provided to BRR by Harris CPAs; Written by Margaret Flowers, CPA
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A 1031 Exchange is defined under section 1031 of the IRS code as a strategy that allows investors to defer paying capital gains taxes on any investment property sold, as long as certain conditions are met. Doing a 1031 exchange allows the taxpayer to sell a piece of property and purchase another “like-Kind” piece of property without depleting the cash flow from the sale due to capital gains tax.
Investors should understand the four types of 1031 exchanges:
1. Simultaneous Exchange. Occurs when the likekind or the replacement property close on the same day as the sold property.
2. Delayed Exchange. When the relinquished property is sold first before the investor acquires a replacement property. This is the most common type of exchange chosen by investors today.
3. Reverse Exchange (or Forward Exchange). Occurs when an investor acquires a replacement property through a titleholder before the relinquished property is sold.
4. Construction/Improvement Exchange. Allows taxpayers to make improvements on the replacement property by using the exchange equity within 180 days while the relinquished property is in the hands of a qualified intermediary. In this case, the property must be “substantially the same” and must be equal or greater in value when it is given back to the taxpayer. This transaction must be completed within 180 days of the sale of the relinquished property.
The common rules to qualify as a 1031 exchange are:
• Properties must be of like-kind or greater value.
• Properties must not be a personal property, they have to be for investment or business purposes.
• The sale of the property cannot receive “boot,” which occurs when the new property acquired is of less value than the relinquished property. The boot received is taxable. If the transaction results in the taxpayer holding less debt after the new property is acquired, boot may have occurred.
• The properties exchanges must go to the same taxpayer, meaning the title holder of the relinquished property must be the same as the new property’s.
• There is a 45 calendar day window after the first property is closed for tax payers to identify up to three potential like-kind properties.
• Lastly, the replacement property exchange must be completed and received no later than 180 days after the sale of the exchanged property or the due date of the income tax return (with extensions), whichever is earlier.
This content was provided by BRR’s accounting firm Harris CPAs. It is provided here for educational and informational purposes only. It is not intended to be nor, should it be used as a substitute for tax advice regarding any specific circumstance. Every fact and situation is different and you should consult with your personal accountant before acting upon the matters discussed in this post.
Tax Implications & Benefits of Holding a Rental Property
Provided to BRR by Harris CPAs; Written by Margaret Flowers, CPA
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When discussing investments, you may often hear the term diversify. One of the ways to diversify your portfolio is to invest in real estate investment properties. Whether you convert your main residence to a rental property or buy a property to be held as a rental, there are several tax considerations to be aware of.
Reducing Income With Expenses
The rental income that you receive is taxable income, but you can reduce that income by the expenses of the property. For example, if you collect rental income of $12,000 but have expenses of $10,000, you will pay tax on the $2,000 profit. If the income less expenses results in a loss, you may be able to deduct up to $25,000 in losses against your ordinary income, depending on your income. If your income is over $100,000 for a married filing joint return ($50,000 for single), your allowed deduction begins to phase out and is phased out completely at $150,000 ($75,000 for single filers). If you are unable to deduct the loss, it will carry over until the property generates positive income or your income is below the limits. What type of expenses are allowed against rental income? The most common expenses you generally see on rental properties are landlord insurance, mortgage interest, property taxes, utilities, repairs, cleaning and maintenance, depreciation and amortization. The mortgage payment usually includes a portion that applied to principal. Since this is a debt payment and lowers your mortgage balance, this portion of the payment is not deductible. Renovations to the property will be capitalized and depreciated over time instead of deducted immediately. Residential properties will be depreciated over 27.5 years while commercial rental properties will be depreciated over 39 years. Usually rental properties will generate positive cash flow while creating a tax loss due to the depreciation of the property. After about 10-15 years, the depreciation will be lower and the property should create positive taxable income. Many taxpayers enjoy the tax benefit of deducting the loss while creating a positive stream of cash flow.
Recent Tax Law Changes
On December 21, 2017, President Trump signed the Tax Cuts and Jobs Act which included a provision for a deduction for 20% of all pass-through income. Rental income is included in this deduction if it rises to the level of a trade or business. Consult your tax professional to discuss the requirements for this deduction. If you have any questions, please contact our office and we would be happy to discuss how owning a rental property may impact your tax return.
This content was provided by BRR’s accounting firm Harris CPAs. It is provided here for educational and informational purposes only. It is not intended to be nor, should it be used as a substitute for tax advice regarding any specific circumstance. Every fact and situation is different and you should consult with your personal accountant before acting upon the matters discussed in this post.
Which Method of Accounting is Right for Land Developers?
Provided to BRR by Harris CPAs; Written by Ryan Paluso, CPA
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Selecting the right accounting method for your land development business is an important step in laying the foundation for a profitable future. Land developers have three methods of accounting to choose from. It is important to understand the tax implications of each one before deciding which method works best for you.
Completed Contract Method (CCM)
In CCM, the taxpayer reports the income and expenses only after the contract is complete, regardless of whether cash receipts were received prior to completion. As for all methods, there are some benefits and disadvantages to CCM. If a contract is in progress at the end of the year, this method allows the taxpayer to defer the revenue and not pay tax until the following year. On the other hand, if a taxpayer has a handful of projects that end around the same time, this will cause a dramatic increase in revenue and expenses. From a third party perspective, this can make the taxpayers business look inconsistent. The CCM is limited to home construction contracts and small contractors with contracts not exceeding two years.
Percentage-of-Completion Method (POC)
In contrast to CCM, the POC method recognizes income and expenses over the life of the contract. Income and expenses for each period are calculated by taking the percentage of current costs incurred over total estimated costs for the contract. That calculated percentage is multiplied by the estimated total income and expenses for the contract to determine the tax liability for the year. For this method to work correctly, you need to be able to reasonably estimate the remaining costs to complete a contract. In theory, this method should provide more accurate and consistent accounting numbers.
Percentage of Completion Capitalized Cost Method (PCCM)
The PCCM is limited to residential construction. As opposed to home construction, buildings with four or fewer dwelling units, residential construction comprises of buildings with five or more dwelling units. Examples of residential construction include apartments, condominiums, nursing homes and prisons. Hotels and motels do not qualify as residential construction. PCCM allows the taxpayer to use a combination of the CCM and POC. Under PCCM 30% of the contract is under the CCM and 70% is under the POC method. The advantage of the PCCM is the taxpayer gets an additional deferral thanks to 30% of the contract accounted for under the CCM. Beware, there is an AMT adjustment as AMT requires the entire contract to be reported under the POC method.
If you have any questions regarding which method of accounting you should use for your business, reach out to your CPA. This will ensure you are making the right choice and benefiting your business for the future.
This content was provided by BRR’s accounting firm Harris CPAs. It is provided here for educational and informational purposes only. It is not intended to be nor, should it be used as a substitute for tax advice regarding any specific circumstance. Every fact and situation is different and you should consult with your personal accountant before acting upon the matters discussed in this post.