The New TCJA Taxes for Real Estate Brokers: What You Need to Know
When the Tax Cuts and Jobs Act (TCJA) became law in December 2017, real estate professionals immediately began contacting us with questions. Are there new breaks on taxes for real estate brokers? Will the TCJA increase taxes for real estate brokers?
However, the most common question we’re getting here at Robert P. Russo CPA is this: How can I get that new 20% qualified business income (QBI) deduction? That’s what we’ll focus on now…
The TCJA presents both opportunities and challenges in regards to taxes for real estate brokers. Yes, you could benefit from that 20% QBI deduction – if you meet certain stipulations which we will cover. However, without careful tax planning, you could miss out on the ability to deduct anything at all! Taxes for real estate brokers vary based on how much you earn in profits – and even how your business is set up.
The TCJA is known for being complex, but one thing is very clear in regards to taxes for real estate brokers and other professionals…
The TCJA states that you can deduct the lesser of two numbers when it comes to taxes for real estate brokers on a personal return. Those who operate as independent contractors through a sole proprietors or single-owner LLCs (which covers most real estate brokers) put their earnings onto their personal income tax return – or Schedule C form.
If you are a broker or other real estate professional filing on Schedule C…you can deduct the lesser of:
20% of the profits generated by your business OR
20% of your total taxable income on your personal returns
Let’s take a closer look at a few scenarios…
Scenario 1: Taxes for Real Estate Brokers Who Qualify for the 20% QBI Deduction
Juan is a real estate broker who is single and runs his brokerage as a sole proprietor. In 2018, he earns $150,000 in commissions and had $50,000 in expenses. He had some additional income of $30,000 through interest and a rental property he owns. Now, Juan, like all Americans can take a $12,000 standard personal income tax deduction in 2018. So let’s see how this all adds up in regards to taxes for real estate brokers like Juan:
$150,000 in profits – $50,000 in expenses = $100,000 in profits after expenses
$100,000 profits + $30,000 additional income = $130,000 adjusted gross income
$130,000 – $12,000 standard deduction = $118,000 total taxable income for 2018
Now, Juan can deduct the lesser of:
20% of his profits ($100,000 x .20) = $20,000 OR
20% of his total taxable income = $23,000
So, Juan can deduct $20,000 from $118,000 (his total taxable income). Juan is now only paying taxes on $98,000. This is a great example of how taxes for real estate brokers come out favorably under the new tax law!
However, here’s where things can get dicey in the world of taxes for real estate brokers…Juan was able to take this nice 20% deduction because his taxable income was under $157,500. But what if you make more than that? Pay close attention to this next scenario…or you could completely lose the ability to take any deduction at all!
Scenario 2: Taxes for Real Estate Brokers Who Make More Than $157,500
Let’s take a look at taxes for real estate brokers who earn more than $157,500. Why is this the magic number? Because if your taxable income surpasses this number – and you’re a sole proprietor or LLC and do NOT receive a salary – you can lose out on any deduction at all! That’s because the IRS changes the game at this point:
You can deduct the lesser of:
20% of your profits OR
The greater of (50% of W2 wages paid through your business) or (25% of the wages plus 2.5% of qualified property)
Since most real estate brokers do not pay W2 wages or earn a salary, they can be in trouble at this point. Let’s look at an example – then see how you can “fix” these taxes for real estate brokers.
Leslie is a single real estate broker who earned $150,000 in profits through her LLC. She had additional income of $20,000. Therefore, her adjusted gross income was $170,000. After the standard deduction of $12,000, Leslie’s total taxable income is $158,000. Uh oh, that’s above the $157,500 threshold. What can Leslie do?
Option 1: Transition her business to an S-corp and pay herself a reasonable salary so she can still benefit by deducting taxes for real estate professionals!
By transitioning your brokerage business from an LLC or sole proprietorship to an S corporation, you can improve your tax posture if you’re a high earner. View these 6 myths and facts about setting up an S corporation. As an S-corp, taxes for real estate brokers can get even more complex, so it’s critical that you work with a qualified CPA who specializes in real estate tax law, like Robert P Russo, CPA.
Option 2: Look for ways to deduct additional business expenses, and get below that $157,500 threshold.
There’s still hope in regards to deducting taxes for real estate brokers on the brink of $157,500. Seek out additional business expenses you can deduct! If you’ve been meaning to upgrade your laptop (that you use for business purposes of course), do it now. If you’re looking for new clients, purchase advertising or set up a new website – since marketing expenses are fully deductible through your business.
Most importantly, take action now. Talk to a tax professional and ensure that you don’t miss out in thousands of tax savings this year – and in the future!