Tax tips for real estate agents

Florida's Gulf Coast has seen tremendous appreciation in real estate prices and a sometimes frenetic environment among buyers and speculators. Not surprisingly a growing community of real estate professionals have taken up the charge to service this exciting market. We have been able to work with a number of these individuals and here are some of the things we find ourselves discussing on a regular basis.

1. Consider incorporation. Liability protection is important in today's litigious environment. By now most real estate professionals are familiar with P.A.’s and S corps. Incorporation can provide some liability protection and it may also provide some more options for reducing your overall tax burden. We have also noticed that some of our clients benefit from the additional discipline and segregation of personal and business activities required of a corporate entity.

2. Renovate your home office. If you have a setup at home talk to your tax advisor about formalizing the space to meet home office requirements. Normally non-deductible items such as home owners insurance, repairs and maintenance and internet access could reduce your taxes.

3. Develop a vehicle and transportation strategy. Sit down with your CPA and develop a strategy for purchasing, maintaining and operating one of your business's most valuable assets. There are many options and choices such as lease or purchase, actual expenses or mileage rate. All have big tax implications as can the actual type of vehicle you purchase. Do not be passive with regard to one of your largest monthly expenses.

4. Capture everything. Setup a system with a segregated bank account and establish a bona-fide set of business records. Whether you are incorporated or not, this simple step can result in identifying an additional 10-25% of tax deductible expenses.

5. Take advantage of tax deferment vehicles. As your own boss you have more leverage in putting before tax dollars into a SEP rather than an IRA. Using these plans you can put away as much as $40,000 of income. Plans do not have to be setup or funded until your tax return deadline (including extensions).

6. Time your income and expenses. Going into December you should know just how much income you stand to report for the year and what your likely tax liability will be. With this information there may very well be a closing you can push back or accelerate, expenses you can prepay or defer and distributions you can take. If your CPA is not hosting a third quarter planning session with a follow-up in late November you may be missing opportunities for significant tax savings.

7. Separate your investing activities. If you are a P.A. or other incorporated entity and you also hold real estate for investment purposes avoid the temptation to put the real estate in your business. Corporations must mark assets up to fair market value before transfer meaning a simple re-title of your property could result in a substantial tax bill. You also run the risk of having property transactions reclassified as inventory sales for which capital gains treatment will be disallowed.

8. Take advantage of estimated payments. Most people who hate estimated income tax payments fail to understand how they work. Under IRS safe harbor rules you can use estimated payments and withholding to keep substantial sums of money in your pocket until April 15. Each quarter you should be reviewing your income position with your CPA to determine the amount and timing of any required payments.

9. Consider restructuring your compensation plan. Many agents receive 1099's from their brokers and are treated as independent contractors. If you receive a W-2 instead many of your deductions may be limited based on adjusted gross income. Some agents have been successful in negotiating alternative arrangements with their employers whereby they are treated as contractors or statutory employees and given more flexibility and autonomy as a result. While not for everybody, it can work wonders in the right situation.

10. Get good advice. Your CPA, attorney and other business advisors should be kept abreast of your activities throughout the year. Otherwise you will be planning after the fact with much less effectiveness.