Most real estate agents are not considered employees under federal tax guidelines. Rather these sales professionals fall under the tax category of self-employed, independent contractors, or sole proprietors. This is even the case when you are licensed through a real estate agency or brokerage. So what does this mean for your taxes?
Unlike W-2 employees, real estate agents earn a portion of their salary via commissions from sales transactions. These commissions will vary by the price of the property, health of the real estate market, and your negotiated commission rate. In most locations across the states, the average real estate commission rate is around 6%. Yet, this figure can end up being higher or lower depending on your agreed contract.
As might be assumed, real estate taxes, salaries, and commissions are highly personalized. Not all realtors earn the same amount of money nor sell the same quantity, which will ultimately affect a sales professionals’ taxable income. For these reasons, it’s important to have a thorough understanding of your tax expectations and limitations as an independent contractor. Familiarize yourself with the basics of real estate agent taxes, salaries and commissions below.
For those who are interested in becoming a real estate agent, the first thing you should know is that qualifications will differ among states. In most cases, you are not required to have a college degree, but you must be at least 18 years old and have legal residency. It also helps to have prior sales experience or a strong initiative to grow within the real estate profession. The starting process involves taking a pre licensing course from an accredited real estate licensing school. Next, you’ll take your licensing exam.
Once you pass, you’ll be well on your way to becoming an official real estate agent. It’s crucial to note that you must activate your license with the state before you can legally work as a real estate agent in your area. Additionally, you may want to join popular organizations such as the National Association of Realtors (NAR) to expand your knowledge and network from the initial stages of your career. Joining associations is also an opportunity to advance your title from real estate agent to realtor. (Yup — there’s a difference!)
A real estate agent’s salary will depend on a few common factors. Particularly, the region in which you operate, the economy, and the client. According to the U.S. Bureau of Labor Statistics, the median pay for real estate agents was $48,770 in 2021, averaging $23.45 per hour. This average takes into account realtors of various experiences and education, so it may not be the most accurate depiction of what real estate agents or brokers make in your area. In fact, on-average real estate brokers take home a six-figure salary, making it one of the highest paying jobs in the profession.
Apart from location and the health of the market, motivation plays a huge role in how much you will earn as a real estate agent. In a competitive market like nowadays, you will need to find your niche and develop close ties within the community. One of the best approaches to expanding your network is using social media as a way to connect with potential clients. Basically, the more opportunities you have to represent a seller or buyer, the better chance you have of exceeding your salary goals for the year.
Real estate agents maintain a lucrative role in helping clients buy, sell, and rent properties. For their time and services, real estate agents are entitled to a commission on every sales transaction that is made throughout the tax year. Although commissions are not fixed by law, most brokerages keep the rate around 5-6% of the home’s value. For example, if you put a client’s house on the market for $500,000, the commission would be $30,000 with a 6% rate.
In order to secure your commission rate, it should be clearly specified in the listing agreement. This is the official contract between the property owner and the real estate broker that gives you the legal rights to act as the owner’s agent in the sale of the property. Keep in mind, the final commission is often split between the real estate agent and the broker. The amount of commission split will depend on the agreement between you and your broker. In many cases, a 50/50 split is common.
As a real estate agent, it’s important to take advantage of every tax deduction available. With that said, all claimed business expenses must be ordinary and necessary, directly related to your business and within a reasonable amount. Understanding these IRS restrictions will help you navigate your tax filing as a real estate professional. But now, let’s get to the good stuff! Here are the most common real estate and broker tax deductions at your disposal:
All components considered, real estate agents will find transportation costs yield the highest savings on their tax return. This is because realtors spend a majority of their time on the road, traveling from client meetings, open houses, and other work events. This allowable tax deduction can be calculated using two methods: the standard mileage rate or actual expense method. The best deduction method will vary by year, however, it’s sensible to keep accurate reports of all transportation costs for IRS purposes.
With the standard mileage rate, you will need to implement mileage tracking into your daily routine. Your first thought might be, “How do I have time to track mileage?”. We’ll admit — human error is not uncommon when using a pen and paper mileage log. But what if mileage logging could be made easy? With a mileage tracking app, like MileIQ, all you need is your mobile device or tablet every time you drive for business. Just open the application on your phone, and let it run in the background. All your business miles will be safely stored for when tax season comes about.
Interested in learning more about mileage tracking for real estate agents? Get the most up-to-date tax information with MileIQ.