I was having a conversation with another realtor the other day, and they said something that truly haunted me.
It made my skin crawl…
I started to feel a bead of cold sweat running down my temple…
And I had the distinct urge to throw my hands up to the sky and curse the gods!
What was the topic of conversation, you ask?
This 1099 employee of a real estate brokerage was going to have to pay $75,000 in taxes from commission garnered in 2021! That is INSANE!
As a licensed realtor, and a 1099 employee of our brokerages, we’re required to personally save a chunk of each commission check and then when tax season comes around the corner, depending on which tax bracket we fall into, we’ll have to pay a portion of these checks to the good ol’ U.S. government. Sounds fun, right?
And with the case of my realtor buddy above, these amounts can be significant—like $75,000 significant!
I want to preface what I’m about to share—I’m NOT a licensed tax professional, and the recommendations I share come from personal experience. Always, always, always speak to a tax professional regarding your personal situation.
Glad we got that bit out of the way. Now to the good stuff!
If you’re a full-time realtor, in the eyes of the United States government, you’re what they call a real estate professional and can file your taxes under the exemption of a real estate professional. But what does this mean?
Most notably, there are NO LIMITS to the amount of deductions you can make against the gains of your real estate business or the amount of depreciation you can claim on your investment properties.
Individuals who fall outside of being a real estate professional are capped on the amount of depreciation that can be claimed against income outside of their rental properties.
Let's use a real-life example here. Remember that realtor buddy of mine who has to pay $75,000 in taxes for 2021? Well, both he and I made roughly the same amount of income in 2021. However, Emily and I own multiple rental properties across Minneapolis. We’ve performed cost segregation studies at a number of these properties, allowing us to claim more depreciation up front. By claiming depreciation against the realty income I made in 2021 (and remember, there’s no limit to the amount of depreciation I can utilize), I was able to reduce my tax liability for 2021 to ZERO. Yes, ZERO! Meaning, by OWNING rental properties and leaning into the tax benefits of being a real estate professional and depreciation, I’ve saved myself tens of thousands of dollars that I would’ve had to pay to the government.
I could go on and on here…
But in short, if you’re a realtor or a real estate professional you should DEFINITELY consider owning rental real estate, if only for the sole reason of saving yourself tens of thousands of dollars come tax time by leaning into depreciation.
If you ever want to chat more about taxes, real estate or investing, hit me up any time.