There’s a secret $1,000 deduction most Realtors miss when filing their Form 1040 tax return.
It’s an easy deduction to miss, but it’s also easy to find and include on your return. If you just know what to do, you can quickly add a $1,000 tax deduction to your return and have more money left in your pocket.
Read this article, and you’ll know just what to do!
Two Annual Reports from Your Broker
At the close of every calendar year, your broker can provide you with two reports on your Gross Commission Income.
- Form 1099 Misc. You’re familiar with this form. It reports your top line income. It goes to the IRS to report your Gross Commission Income for the year, and you also receive a copy, typically by mail in late January, or at the office in your mailbox, or online
- Statement of Account. You’re likely no familiar with this document. It reports your expenses in terms of fees you paid to your broker. You generally have to ask your office manager or broker for a copy of this report
I walk through this second form, in detail, in a recent YouTube video. To see the video, click here: https://youtu.be/3gZMLYX2XEI
The account statement shows a breakdown of each of your transactions during the year. You’ll see the property address, gross commission, commission split with the broker, net commission, and so on for each transaction
So far, so good.
Then at the bottom of the report you will discover a list of other expenses. These are the fees that your broker charges agents for miscellaneous expenses.
What kind of ‘miscellaneous’ expenses, exactly?
Well, it would be reasonable for you, if you were the broker, and you were providing resources for the benefit of your agents (e.g., website, desk space, copy machine, coop advertising programs), that you would allocate a part of those fees to your agents.
These are the charges many agents miss when they file their tax returns.
Here’s a great example:
This tax season I had an agent who generated $106,0000 in GCI. After the broker received his split of that $106,000, the commission that wen to the agent was $87,590.
$87,590 is the amount that was reported on her 1099.
$87,590 is the amount that went on the top line of her tax return as “Gross Receipts”.
What commission income amount was actually deposited in your bank account?
But $87,590 is not the amount that was actually paid out to her.
Instead, $85,900 is the actual commission income that was deposited into her bank account.
So… where did the other $1690 go?
In her case it went to pay for
- the agents page on the company website,
- errors and omissions insurance,
- signs panels,
- presentation folders,
- name riders and
- common expense (my personal favorite!)
I love the ‘common expense’ category, because that’s where 90% of that $1,690 was hidden. It’s not broken out on the statement, but my guess is that it could have included desk fee, admin fees, tech fees, and more.
I’ve also seen brokers include a charge for portion of their own business license fee every year. It shows up on account statements as “BLT fee”. (“BLT please, hold the mayo…”)
If you don’t capture these fees paid to your broker as a tax deduction on your business return, then you’ll pay income tax (10%-37%) tax plus self-employment tax (15%) on these fees. This generally means $400-$800 more in tax– and less cash in your pocket– on April 15.
Anchor on this: Don’t just ask your broker for your 1099 at year end. Be sure to also ask for your annual Statement of Account. You’ll discover hundreds of dollars in fees paid to your broker that are fully deductible on your tax return. That means less money paid to the IRS, and more cash in your pocket to live the life you love.