Are you taking advantage right now of every tax break that is legally available to you? Probably not. The genius, Albert Einstein, is attributed to saying about taxes, “The hardest thing in the world to understand is income taxes.”
Are you trusting your tax advisor to provide you with all the tax saving benefits available to you? As experienced as many tax advisors are, most largely do a great job of recording the history that you give to them. It is far more uncommon to find an accountant that provides you with insight about tax breaks that you are not already taking.
Let’s explore some Tax Saving strategies and benefits – recommendations to put you in the driver’s seat and potentially put more money in your pocket, legally.
#1 Create A Financial Plan
Do you have a financial plan in place? A financial analysis is your green roadmap. It creates a picture for you to know where you currently are and what you need to do in order to accomplish your financial dreams. That includes a retirement plan, no matter your current age. Many real estate agents don’t know what they will be making next quarter or this year – even if they do have goals. Tax preparers work on the past. It’s time to be proactive and plan for your future. In an ever-changing economic environment such as real estate, financial planning creates powerful benefits.
Financial planning is one of the keys to enter your financial doorway. There are two ways we are told that we can act. One is by making more cash. That is called financial offense. Then there is financial defense, which means that we can spend less. Spending less can be more challenging.
Financial planning will positively guarantee your results and help you keep more of your hard-earned money.
Who Do You Call for Financial Planning?
Financial Planners offer you advice based on the best way to save, invest and grow your money. The differences in each are based on the way they are compensated.
It is recommended to go with a certified financial planner (CFP) as noted below. You may want to avoid commission-based planners as they may be pushing their financial products rather than focusing on what suits you best.
As a start to finding the right financial planner for your needs, ask your colleagues if they can recommend one. If you have kids and/or grandchildren, ask someone who has children or a large family also. Are you single and just starting out in the real estate business? Find a planner with successful experience advising clients in the same life stage as you. That goes no matter what age you currently are.
It is an advantage to start out early in life AND don’t let that stop you. You are perfect at whatever age you currently are to navigate your financial realm.
Check out these options:
- NAR’s Center for REALTOR® Financial Wellness
- The National Association of Personal Financial Advisors (NAPFA)
Here are some examples of the different types of financial planners:
- Certified Financial Planner- After completing lengthy education requirements and work experience, they can offer financial advice.
- Broker or Stockbroker – Many times, if you currently have investments with a company, they will offer you financial planning free of charge. Brokers or Stockbrokers are typically commission based.
- Registered Financial Advisor – They give you advice and recommendations for a fee.
- Enrolled Agent – They focus on tax preparation. Can help you navigate your taxes because they have studied the tax codes. Some specialize in real estate.
#2 Choose the Type of Structure That Best Fits Your Business
Currently, many real estate agents are operating as Sole Proprietors or as a General Partnership.
- As a Sole Proprietor, you are an individual owning a business alone and not as a separate entity.
- A General Partnership is two or more people who agree to be partners in a business venture.
The above classifications, according to Steve Dalia, founder of allfilings.com, do not provide you with the same legal protection as forming a corporation. He emphasizes that your personal assets are not protected on those two classifications. That’s why he recommends incorporating. Incorporating is designed for the company to be set up as a separate legal entity, having its own privileges and liabilities, distinct from its owner. The keyword here is separate. Your business and personal assets are…separate…from each other.
Because each state has its own laws, check your state and your tax advisor to see what legal entities are available for real estate agents where you live.
In general, the two most popular types of business entities available for real estate agents are a Professional Association (PA) or a Limited Liability Company (LLC). It is your decision as to what type of business entity to establish, considering the size of your company and the nature of your business. Examples of the different type of real estate specialties include sales, property management, and investments. For real estate professionals, these factors almost always result in the creation of a PA or LLC.
An LLC has the legal capacity to enter into:
- agreements or contracts
- incur and pay debts
- sue and be sued
- be held responsible for its actions separate from its owner
Establishing your entity is the first step to reducing your tax liabilities. The benefits can be quite significant, so please discuss with your tax advisor now to find out which entity best suits your needs. There is still an opportunity to become incorporated for this year, 2019, and there are multiple tax saving benefits available by incorporating. The majority of real estate agents are not aware of them.
Here are some benefits to consider.
Benefit 1: Less Risk of An Audit
Many real estate agents fear the tax audit. Steve Dalia says that according to the Wall Street Journal, IRS statistics indicate that you are 10 times more likely to be audited as a Sole Proprietor, than as an S-Corp/PA. In 2017, the Wall Street Journal continues to report that the IRS audited 1 in about 160 individual tax returns. This was actually the lowest since 2002 and the sixth consecutive year that audits have declined. One of the reasons for this is that staff, due to budget cuts, have been reduced.
Benefit 2: Discover Business Deductions Often Missed
These are some of the business expenses that many real estate agents do not take or do not know are legal deductions.
- Home Office
- Meals and Entertainment
- Hiring Your Children or Grandchildren over 7 years old
- Health Insurance- Setting Up A Health Savings Account
- These examples apply differently according to the corporation you choose. Again, please check with your tax advisor.
Benefit 3: Added Credibility
The majority of businesses operate as a corporation. Having a PA or LLC after your name can create instant credibility that you are a viable business.
Homeowners and buyers often prefer doing business with an incorporated real estate professional, and this could lead to more listing and buyer contracts.
Once you incorporate, please make sure that you inform your brokerage, so they pay you as a corporation. Also, report the change to your state regulatory agency.
Check Your State Requirements Before You Incorporate.
The topic of incorporating is a very state-specific topic. Some states are very flexible, easy, and inexpensive to incorporate in, and others are very difficult and expensive. Some states do not even permit real estate agents to incorporate at all. It is very important to always check with the Real Estate Commission in your state to understand their rules.
A couple of examples are as follows: Florida is a very easy and inexpensive state to incorporate. Florida also permits real estate agents to incorporate as a PA which stands for Professional Association as discussed earlier in the article. Most Florida real estate agents who incorporate choose the PA because it is a few dollars less expensive than an LLC. Real estate agents also like being classified in the same small group of professionals who can also use this designation (Doctors, Lawyers, Accountants, Architects).
New Jersey, on the other hand, does not permit real estate agents to incorporate at all. You should know this before you go out and spend any time or money trying to incorporate in this state.
Other states will permit you to incorporate as an LLC or a Corporation, but there may be high fees when you choose one over the other. For instance, the State of California imposes an $800 Franchise Tax on LLCs in the state. You will notice that most California real estate agents who incorporate choose actual corporations to avoid the fee.
There are multiple benefits to incorporating and I urge every real estate professional to seek guidance on this topic from a tax expert. The sooner you file as a corporation, the better, so you can enjoy the financial benefits for this calendar year.
To a prosperous and tax-saving year for all real estate professionals!
Written for Form Simplicity by Janice Zaltman, a Realtor, LEED AP, Marketing Coach and Writer with more than 20 years of experience in the sales, marketing and media fields.