Clock is Ticking for Real Estate Agents to Cut their 2006 Tax Bill, Advises

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Tax planning is an ongoing process. Even so, as a real estate professional, there's still time to save taxes for 2006, says

Tax planning is an ongoing process. Even so, as a real estate professional, there's still time to save taxes for 2006, says

"As a real estate agent or broker, consider paying all of your outstanding bills before the end of the year, since you can generally deduct your professional expenses directly against your commission income," explains Andrew Schwartz CPA, founder of, where taxpayers can locate and interact with CPAs and EAs based on the professional's specialty. "Items paid with credit cards are deductible in the year charged," adds Schwartz.

Allowable expenses include anything that is "ordinary" and "necessary" in connection with being a real estate agent, including advertising costs, cell phones and internet access, gifts to clients, and professional dues and licenses. A complete listing of professional expenses common to real estate agents is available at

Why are most real estate agents taxed as independent contractors? According to the IRS in Publication 15-A, Employer's Supplemental Tax Guide: licensed real estate agents are treated as self-employed if "substantially all payments for their services as real estate agents are directly related to sales rather than to the number of hours worked, and services are performed under a written contract providing that they will not be treated as employees for federal tax purposes."

Auto Savings

Deducting automobile expenses is another way for real estate agents to save taxes. Each year, taxpayers can base their deduction on either the standard mileage rate or the actual expenses incurred during the year, including insurance, gas, repairs, and lease payments or depreciation based on the car's original cost. The standard mileage rate is 44.5 cents per mile driven in 2006, increasing to 48.5 cents per business mile in 2007. Don't forget to claim the business use percentage of the interest paid on your car loan as well.

Now is the time for people to update their mileage logs for the year. During an audit, the IRS will most likely ask to see a log substantiating the automobile deduction claimed.

Child Labor

Realtors with children under the age of 18 could save some taxes by employing their child. There's a special loophole that exempts children of self-employed individuals from paying social security, Medicare, and federal unemployment taxes on wages paid by a parent.

"For 2006, as long as your child is under the age of 18, you can pay him or her up to $5,150, and your child won't owe any income taxes on that money, assuming they have no other income. Even so, you get to deduct the wages paid as a business expense," said Schwartz. Another benefit is that the child can fund an IRA or Roth IRA with up to $4,000 this year based on the wages paid by the parent during the year.

The due date for getting set up as an employer with the IRS is December 31st. And make sure to only compensate the child a "fair wage" for services provided during the year.

Save Taxes By Saving For Retirement

Setting up a self-employed retirement plan is another way to save taxes. Take a look at the Solo 401(k), which generally allows for larger contributions than a SEP IRA, provided the real estate agent has no employees who work more than 1,000 hours per year except for a spouse.

With these tax advantaged retirement accounts, self-employed individuals can contribute $15,000 ($20,000 if you are 50 or older) plus 20% of net self-employment income, up to $44,000 for 2006. For anyone 50 or older, this year's max increases to $49,000. Amounts contributed reduces taxable income and grow tax-deferred. The deadline for setting up a Solo 401(k) is December 31st.

Otherwise, real estate agents have until the due date of their tax return, including extensions, to establish and fund a SEP IRA. The maximum contribution into these tax-advantaged retirement plans is as much as 20% of net self-employment income.

Special Tax Break for Real Estate Agents

"If you own rental real estate, you have until the end of the year to take the necessary steps to be able to max out the rental losses you can claim. As a real estate agent, the "passive loss" rules that limit deductible rental losses to just $25,000 per year don't apply to you. To qualify for this exception, however, you need to spend more than half your time, and at least 750 hours, during the year working in the real estate trade. Plan your schedule accordingly through the rest of the year to ensure that you meet these two requirements," explains Schwartz.

About Andrew D. Schwartz CPA

Andrew D. Schwartz, CPA is the editor and founder of, a network of CPAs who specialize in real estate agents and brokers, and, a site where taxpayers can locate and interact with CPAs and EAs based on the professional's specialty. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.


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