With the real estate market booming once again, you may see an increase in real estate professionals looking for help from a tax specialists like you. In general, rents included on Form 1099-MISC are reported on Schedule E and are not considered self-employment income. However, rents are reported on Schedule C and are considered self-employment income if you provide significant services to the tenant, sell real estate as a business or rent personal property as a business. Substantial services include those that are primarily for your tenant’s convenience, such as regular cleaning, changing linen or maid service. Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, and related items.
Here are several tips you can pass on to your clients in real estate to help them maximize their tax benefits and have a rewarding real estate career:
- Set up a dedicated office space: If your self-employed clients are planning on working from home, they can set up a dedicated space for business in their home. If they regularly and exclusively perform administrative or managerial activities for their business within part of their home, your clients can claim a home office deduction for a portion of their expenses related to utilities, rent or mortgage interest, and cleaning.
- Be aware of what constitutes a business deduction: According to the IRS, self-employed people can deduct a business expense as long as the expense is directly related to generating profit in the business. Deductible business expenses include start-up costs up to $5,000 (the deduction is reduced by the amount that start-up expenses exceed $50,000), including the amount paid to either create a trade or business, or to investigate the creation or acquisition of a trade or business. Examples include advertising the opening of a business, employee training and a market survey. Travel, mileage, actual car expenses, home office, and any lead-generation or customer relationship management software your clients pay for, are also deductible business expenses. If the expense is reasonable and directly related to the business, it can save your clients money at tax time. Refer to IRS Publication 535, Business Expenses, for tax deductions you may have overlooked, such as out-of-town business travel costs and depreciation on your clients’ business car or truck.
- Use tools to track real estate income and deductible business expenses: Tracking income and expenses can be a complex process, but there are tools out there to help your self-employed clients in this regard. Tools, such as QuickBooks® Self-Employed, can help your clients easily track their real estate income and categorize their deductible business expenses. QuickBooks Self-Employed also enables your client to build out a profit and loss statement to share with you, making preparation of taxes and serving as a trusted advisor to your client even easier.
- Get your health and retirement benefits: Remind your clients that when you are self-employed, health insurance is fully tax deductible, as are the costs for their dependents’ insurance coverage.
Your real estate clients, by virtue of being self-employed, have an array of retirement plans available to them as well. The simplest is the IRA, but individuals are limited to contributing $5,500, plus another $1000 if they are 50 or older. An alternative is the SIMPLE: Your clients can contribute up to $12,500 to a SIMPLE plan, plus another $3,000 if they are 50 or older. Or, if your clients want to make greater tax-deductible contributions, they can set up a SEP-IRA and contribute up to 25 percent of their salary, up to $53,000. If they don’t have any employees, they can create an individual 401(k) and contribute up to $18,000 ($24,000 if age 50+).
Tax issues for real estate professionals who are self-employed can be complex. However, your expertise can help your clients minimize the burden of taxes and maximize their tax benefits so that they can focus on building a successful real estate career.
Interested in learning more about tax issues in other industries? We have more available on the Intuit® ProConnect™ Tax Pro Center!