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RealXperts: Four Tax Tips Every REALTOR® Should Know

RealXperts: Tax Tips for REALTORSIn this installment of RealXperts, Chris Bird brings his 16 years of experience as an IRS agent to the table to give you the four most essential tips you need to know as a real estate professional when it comes to filing taxes. As a self-employed real estate agent, federal and state income taxes can be exceptionally daunting and frustrating. Chris covers the ins and outs of proper preparation, dos and don'ts for deductions, and the value of starting early.  These four tips should be considered by all real estate progessionals before meeting with their tax professional each spring.



Hi, I'd like to welcome you to Kaplan's webinar on four tax tips that every realtor should be aware of. In fact let me say this, these four tax tips apply to any business that anyone's in, whether its contracting, whether it's speaking, whether it's advertising, whatever. These are just four really good tax tips that I want you all to be aware of.

My name is Chris Bird and I do a lot of instruction. I spend about 130 days on the road. I teach a lot of classes for Kaplan and if you're interested in taking anything that I do with Kaplan, please check Kaplan's website.

My content is very rich. There's a lot I need to talk about. If I have time to take questions today at the end of this I will, but I cannot guarantee that I'm going to have time for questions. We'll see how our time comes in.

Now, little bit about my background. I've been doing this for over 30 years. I started right out of college as an IRS agent, in fact I was trained in Minneapolis, Minnesota for the first year and a half. I do spend about 130 days on the road speaking on tax and financial planning matters. I'm a certified financial planner, I am a licensed [inaudible 00:01:19] real estate broker. But my passion is speaking.

So I want you to enjoy this and I want you to take this material from a conceptual standpoint and don't get into the trenches with it but just get out of it what you can so you can talk to your accountants about this. Now first and foremost, you are not here to become accountants. But if you learn something that you think is interesting and you think is relevant to your tax situation, please take my material to your accountant, have a discussion with him.

Also please start using programs like Quicken or QuickBooks or mint.com. For the younger audience, mint.com in the cloud. I think it's basically free and it just really does almost what Quicken does. I personally use Quicken, but all of these are good programs. Talk to your accountant about what they might want you to use.

Now I have four points I want to talk to you about today and the first one is get your records organized. So if you're using the same accountant that you used in 2013, I want you to contact the accountant, have them prepare you a organizer for your '14 tax return. What that organizer will have, it'll have basically all the information line by line and the amounts that appeared on your 2013 return on the '14 organizer so that you don't forget anything that you claim last year.

It will also have a lot of questions that your accountant is going to want to ask you during the interview to have the return done. But above all please don't get in the habit of just dropping your material off to your accountant and then pick it up a couple of weeks later. You're just not getting the full service of your accountant. You need to talk to them, you need to ask them questions and part of this webinar is arming you with the right questions to ask your accountant about.

Now the second point I want to talk to you about and this may sound like a Boy Scout, but this comes from the heart. Do not play around with your tax return. Your income is taxable, all your income should be reported on the return. Aggressively but legally claim your tax deductions. If something is personal it shouldn't be on your return. But if it is arguable that it could be a business expense, then you should be talking to your accountant about it.

Let me tell you a quick story. I was contacted last summer by a very successful real estate agent that has been at my seminars over the years. She was almost crying on the phone when she called me and I don't do her tax returns. In fact, I don't do tax returns for a living anymore. She was under audit by the IRS and she was literally scared of the audit. And I asked her, I said, "Did you report all your income?" And she goes, "Absolutely." And realtors, you know you get a 1099R from your sponsoring [inaudible 00:04:22] 1099 miscellaneous, from your broker and that's your income for most of you.

But what she had done and she admitted to me is she overstated deliberately a number of deductions and honestly by over $150,000. So I told her to basically tell her accountant about this and I hope all goes well for her in the audit. But I ask you please, you're ethical realtors, be ethical in your tax filings and then you don't have to look over your shoulder and you can sleep at night.

Now the next point and this is where I'm going to spend most of my time in this webinar. Check and double check that you're not missing legitimate deductions. I'll give you an example. One common question that I get in doing these webinars and whenever I speak is, if I file on extension, will that basically reduce my chance of being audited by the IRS? The IRS will never admit that I will tell you that in the practitioner field, in the tax professional field, that is a general consensus that if you file by the October 15 deadline for your 1040 or by your September 15 deadline for your corporation, it may reduce your chance of being audited.

Another common question that I get is, if I have a loss in my first year of being a realtor, can I claim it? And the answer is if you were really trying and it wasn't a hobby and you were really trying to make money in real estate, the answer is yes you can. So don't let an overly conservative accountant talk you out of this.

Now what are some of the other deductions that I need to talk about? And again, this is where I'm going to spend most of my time in this webinar. Your vehicle is probably one of the most significant tax deductions you can take every year. So first let me talk to you about the standard mileage rate.

In 2014 the return you're doing for last year, the standard mileage rate was $0.56 a mile. In December of 2014 the IRS announced for 2015, that the number would be 57 and a half cents a mile. But a lot of accountants miss something. If you claim the standard mileage rate, which I recommend most of you to do, then in addition to the standard mileage rate you are entitled to take any business parking and tolls that you incur, plus, plus, plus any interest on the car loan, the business percentage of the interest on the car loan is deductible in addition to the standard mileage rate if you are self-employed like you are. Don't miss these deductions.

One more thing. Standard mileage rate means less record-keeping. Take a look at the next slide. If on the other hand though you claim the actual expenses, then take a look at the paragraph on the slide, then you're going to be able to deduct expenses like washes, waxes, gas, oil, repairs, maintenance, insurance, interest on the loan, just like you were on the standard mileage rate and one other word, depreciation. So put that word depreciation in your mind because I'm going to take you through a number of slides to show you what that depreciation deduction is all about.

But before I do that, take a look at the numbers on the slide. No one should be taking 100% business use of the vehicle. It's a red flag. I typically use anywhere from 88 to 92% of my vehicle for business every year. It changes every year, it's never the same amount and its just never 100%, I guarantee it.

So in my example let's say you put 24,000 miles on the vehicle for the whole year based on automobile, oil change, receipts where they have to by law put the mileage on the receipt. You put 24,000 miles on the car and by keeping records for at least three months of the year under the sampling technique recommended in IRS publication 463.

IRS publication 463 only requires you to keep detailed records of your business use of the vehicle for three months, three months of the year. That is what I would recommend at a minimum that you do. So in that three months you came up with 4500 miles times 4 is 18,000 and then you would get 75% of all the expenses listed in the next paragraph.

Now, what I want to focus on for the next four to five slides is what you can depreciate if you're claiming the actual expenses. So first, if you buy a used car, a used car, not an SUV, not a pickup truck, but a used car and you use it 100% for business hypothetically, the most you can depreciate is $3160 in the first year.

But if you buy a brand spanking new vehicle, brand spanking new that's not in the code, but has never been owned, it's never been titled, the tax law gives you another $8000 on top of that. And that's all about putting people to work, building the vehicles. If you buy used then that car was built several years ago. If you buy new, it's been built in the relatively recent past.

So the point is, cars are 3160 if purchased used and 11160 if purchased new. And remember you're not claiming the standard mileage rate on this vehicle. Also remember that in addition to these numbers that you're also able to claim the applicable percentage of your gas, oil, operating expenses, insurance, interest on the loan etc.

But then take a look at the next point on the slide. The big deductions come with the heavy SUV, that is a vehicle, an SUV, a sport-utility vehicle with a gross vehicle weight rating in excess of 6000 pounds, which you will find on the production sticker, the production plate on the driver side door jamb or hinge side of the door, it's there. There's even a larger deduction if it is a used or new pickup truck and I'm going to show you all the numbers here.

Now one thing I'd like to say, please don't make the mistake of being penny wise and pound foolish. Don't be looking for a big deduction from these larger vehicles if this is just not what you are. But if you are in need of a vehicle then there some consideration that should be given to some of these things.

Now take a look at this. First of all, here's an example of the SUV and I'm not sure what kind of vehicle this is, some kind of Ford product. But remember this, everything I'm going to teach you now has to do with vehicles purchased prior to '01/'01 of '15. So I'm teaching you the law for your 2014 return. I firmly believe that what I teach you now will also be extended through the end of 2015, but nobody can guarantee that that's going to happen. I believe it will.

As an example, only on December 19th of 2014 were these deductions that I'm showing you on the slides on the heavy SUV and the pickup truck allowable through the end of '14, so we had to almost wait the entire year before we found out it was going to go. Now take a look specifically at the Cadillac Escalade that I have on the slide in front of you. This vehicle, a brand-new, it costs $65,000 and assume with me that you're using the vehicle 90% for business.

Ninety percent times 65 is 595 and the way the deduction is calculated, remember you're not here to become accountants, but the way the deduction is calculated you end up with a $45,700 deduction the first year. Whether you've made a payment on it or not, the first year deduction is $45,700 which I guarantee that you will probably save anywhere from $15-$18,000 in taxes the first year.

Now one more comment. If you're in your first year or so of real estate everyone and you're building up your business, maybe this is not what you want to do. But for those of you that are real successful in your business, that need a new vehicle and you're making a lot of money and this is the kind of vehicle that you would like to drive, this is the deduction.

Now for those of you that may be a little bit more math oriented, if you look at the slide, here's the way the calculation goes. And again, you're not here to become accountants, but it's a combination of the 179 deduction, bonus depreciation and regular depreciation. Every figure in red ends up being part of the deduction which totals 45,700. This slide backs up the picture slide that I showed you previously.

So now the question is, what if you buy this same vehicle used but obviously if you're going to pay the same price for it, then this is a more fully loaded Cadillac Escalade for example, than the one I had before. All I want to show you is this. You buy it used, the deduction is not quite as good. It's now $31,900. So I leave it at that everybody, other than to show you the pickup truck.

Take a look at this slide. If you buy it new or used, and let's say you pay $55,000 for this pickup truck. The first year deduction is 49,500 bucks new or used as long as this full-sized pickup truck has a bed length of at least 6 feet. So not only has it got a have a gross vehicle weight rating over 6000 pounds, which they do, it's got to have a bed length of at least 6 feet. All right, very good.

Now what about other things? Let's get away from vehicles for just a minute. Let's say that you go out and buy a computer, a laptop, a desk model, desk furniture, things like this. You have a choice between claiming the 179 deduction or depreciating those items over basically five or seven years. So its something to talk to your accountant about.

Moving into other deductions and I want to hit this very quickly. Realtors and any self-employed person listening to this webinar, looking at this webinar, how are you going to retire? So what you've got to think about is, SEP IRAs, 401(k)s, things like this. I don't want to make a study out of this. I more or less just want to make you aware of this. But there are things like SEP IRAs and 401(k)s that allow you to put money away for retirement and take a significant tax deduction for doing just that.

So the slide talks about the 401(k), but take a look at the slide I have up now which references the 2014 and the 2015 year and look at the 401(k) column if you would. In '14 you can put in 17,500 and in '15 you can put away 18,000 and with a SEP IRA it's 52,000 and 53,000 respectively.

So food for thought, now watch this. If you want to really put some money away, study this chart with me for just a minute. To grab as many of you as I can in this calculation, I've got three charts. Fifty thousand 80,000, 220,000. Three columns. If you have a SEP IRA look at the bottom row. You can put in those amounts in the bottom row but go two rows above where it says "Equals the 401(k)." All I want you to look at is, you can put more money away with a 401(k) than the equivalent SEP IRA. So that's all I want you to look at. Talk to your accountants about this and see what happens.

Now if you are 50 years of age or older and you use something other than a SEP IRA like the 401(k), you are allowed to put in more money and I kiddingly refer to this as the geezer rule and I can point to myself because I am 50 years of age or older as well. But if you have a 401(k) or an IRA or a simple, take a look at the slide.

For last year, which you can still do now, you were allowed to put an extra thousand dollars into your IRA and extra $2500 into your simple IRA and an extra $5500 into your 401(k) or 403(b) if you've got a job, or 457 if you've got a job with hospitals, school districts, things like this. By the way, that 5500 is actually 6000 for 2015.

So let me kind of summarize this retirement issue. What's your plan to retire? Are you buying rentals? Are you doing that? Are you building a base of rental properties? Are you buying stocks and mutual funds? All of these things can be bought with 401(k)s and IRAs which is another course altogether. But I just implore you to consider what is your exit strategy and what are you doing with your profits, in savings, in investing, so eventually you could retire from this business.

Now a couple of other things if I may. A lot of you have been scared away by your accountants from the home office deduction and I'm here to tell you that as of January 1 of 2013, the IRS totally changed the rules on claiming a home office deduction and specifically took away the so-called red flag nature of the home office deduction.

Now understand this, the real reason the IRS never liked the home office deduction, visualize this, is the minute you back out of your driveway, you're no longer commuting. You're on the government clock for claiming the business use of your vehicle. That's why they've never liked this.

Under the new safe harbor, not only do you get that additional mileage but you get a pretty significant deduction for the business use of your home. Now the only problem is this, I want you to take a look at the slide with me if you would. The first bullet. You must be able to prove that you're using that home office exclusively for the business of real estate.

So what you've got to do is you need to have a separate room set up for this. In my own situation I have a bedroom that when my wife and I built the house about 16 years ago, we had the contractors basically build an office on that wing of the house right next to our bedroom and it is exclusively used in my business of providing tax seminars and financial planning seminars.

The closets have file cabinets in them. There is no private furniture in them. In fact, when we had the house built I had custom furniture built in like a pedestal, table everyone in the . . . and the furniture mounted to the walls and things like this, cabinets and the shelves and things like this. So this is something that your accountants may still feel is a red flag and I'm here to tell you everything changed as of January 1st of 2013.

Now again, take a look at this slide if you would please. If you look at the second bullet which you've got to be able to prove to the IRS, if you get challenged on this in an audit, you've got to be able to prove that you spend more time running your business, for example of real estate from your home office and nowhere else. So you've got to do the administrative and management tasks of running the business from your home office and not from your broker's office.

I'm not telling you you get this deduction automatically. If you were running your business administratively and management-wise from your broker's office and that's where you spend most of the time doing the administrative and management tasks, then forget the home office deduction. But so many of you are really doing that from that home office and you're the ones that you should not be missing this deduction.

One more comment about the home office. A lot of accountants don't like it because and some of you have heard this, when you sell the house you've got to recapture some of the depreciation. Not any more. Under this new rule the way you calculate the deduction does not include depreciation, so there is no recapture when you sell the house and that ought to take an objection from your accountant out of the picture.

Now in addition to all of this everyone, the old method of the home office and the new method are still able to be claimed, I recommend you look at the new method unless you live in a very, very, very expensive home and you're using a lot of square footage for the home office. In that case, maybe, you don't want to use the safe harbor. Maybe you want to go back to the old method which is still very much allowable.

Now in the last year I've been trying to alert self-employed people all over the country about what you see on this slide. 1099 filing requirements, everyone of you knows that you get a 1099 miscellaneous from your sponsoring broker. Well here is what you don't know. What you all need to do is you need to go through your check disbursement ledger for 2014.

You need to determine whether you paid anyone who performs services for you in the trade or business of real estate, for example photographers, virtual tour people, maintenance people, repair people. If you paid anyone who is not a corporation, you are required to give them a 1099 by January 31st of the following year which would've been January 31st of 2015 for '14. And if the IRA catches you not doing this, then the penalties are starting to climb higher and higher and higher.

What you need to do is you need to ask your people that you think you're going to be paying money to during the year, before you give them their first check you asked them to fill out a form W9 which you can download from IRS.gov, on many websites. Its a one-page form, doesn't take five minutes to fill out and they will give you their name, address, Social Security Number or federal ID number and you'll use that information so that by January 31st of the following year you know where to send the 1099 to. So the W9 is where you get the information from them so you can then do a 1099 miscellaneous.

Now the last thing I want to talk about and I'll revisit some of these things also, but I implore you not to put off your taxes till the last minute. What you've got to do everyone, is take this webinar and start thinking about your tax return for 2014 and first of all just to review, I want you to request your accountant to give you an organizer. Start working on that.

And here is what happens so many times and I've been guilty of this over the years, although I've cured myself of this in the last 5 or 10 years. If you give yourself enough time to get your things together and think through the process you're going to have more things, more dollar amounts that you didn't forget so that when you do want to claim those things as deductions, by your own haste you didn't omit something.

Another thing you then need to take your list of deductions and the organizer to the accountant and just don't drop it off. I think I might have said this earlier, make sure that your client, your accountant interviews you and if you've got any questions about anything you might've missed or anything you're not certain of make sure you have a 15, 20, or 30 minute conversation with that account before you leave your tax records there.

In my own situation I can tell you it takes about a week for me to get everything together to do my corporate return, my wife's corporation return, our 1040, some real properties that we've got and I just know from experience that if I try to rush through that I will miss deductions. And then you've got to go through the hassle of filing an amended return if you either made a mistake and over-reported your tax or underreported your tax and those things can be red flags. So I encourage you as a last point, do not wait until the last minute.

So I'd like to offer up if you have any questions I'd like to consider those questions now. We have several minutes before we are done. So if I have any questions, please let's have them.

All right, a question I've got is, this came in from about five of you is, should you incorporate or not. And this is something that you really want to talk to your accountant about and I'll tell you this, I focus on this in many of my seminars with Kaplan. The S-corporation the subchapter S-corporation is probably one of the most common techniques that self-employed people use to reduce their tax liability. It is the second most used form of doing business.

Most of you have chosen to file a sole proprietorship, in fact 67% of all self-employed people file sole proprietorship's. And then the next most commonly used is the S-corporation, followed by the LLC the limited liability company, followed by the C-corporation.

And my point to you is, if you're making good money and you're still a sole proprietorship, I believe you should be talking to your accountant after the tax season and find out whether they concur or don't concur as to whether you should change your business to that of an S-corporation. It is a way in which you can legitimately save maybe 3 or $4000 in Social Security taxes every year and that is something that has been used by self-employed people every bit of the last 30 years. I've been an S-corporation myself since 1991.

Another question that I have and again, several of you have asked this question is, why does the IRS allow these big deductions on these vehicles like the SUVs and the pickup trucks? And the answer to that is simple. Its just a matter of dollars. Those vehicles, the heavy SUVs and the pickup trucks are the highest profit engines of the automakers. So it's about jobs. It's about giving tax incentives to give people the idea that if they buy that vehicle they're going to save taxes which they do. But it also creates jobs for the manufacturers of the vehicles and it's all one big vicious circle going around and round.

I want to thank you everybody. I've enjoyed doing this webinar for you. I hope I've answered some of your questions. Again, I only wanted to do this from a concept standpoint, so I want you to talk to your accountant about anything that I've discussed. And good luck with your taxes and make a lot of money. Thank you very much.