Taxes & Expenses

For most of us, being a real estate agent is the first time we receive 1099 income, which means that taxes are not taken out prior to us receiving payment. While many people consider this a disadvantage, what I’ve learned is that if you educate yourself on how it all works, keep really good income and expense records, and work with someone who can help you strategize, you can actually end up paying LESS in taxes and keeping MORE of your income when you’re paid this way.

Here is an interview with Sally Anderson of Excel Accounting discussing the things you should start keeping track of and thinking about for when tax time inevitably rolls around.

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Here are some handy tools for tracking your income and expenses:

Sales Tracking Spreadsheet. Use this sheet (make a copy and add your own sales info) to keep track of your closings and any other real estate related income. I also like to keep my running list of upcoming clients with a rough estimate of when I think they’ll be ready to buy. This way, when I’m feeling a lull or have a moment to connect with people in my pipeline, I know who to reach out to first.

Expense Tracking Spreadsheet. Use this sheet (make a copy and add your own expense info) to keep track of all your real estate related expenses.

I really love this app, Personal Capital, for tracking my net worth. I’ve been using it for a few years now and it’s been an eye opener to see things change and an inspiration to make the right choices every day and month because I can visually see what I’m working with.

Mileage. There are a ton of great apps to use for tracking your real estate mileage. MileIQ is a very popular one. Start these apps when you head out on appointments and they’ll track your miles via your GPS. You can also make a reminder on your calendar to review your miles monthly. Go back through your Showingtime records and appointments on your calendar and figure mileage with google maps.

Establishing an LLC. If you wish, you may establish your own LLC and receive your commission payments into the business accounts owned by the LLC. Please discuss this decision with your accountant or tax professional to decide if it’s right for you. To establish an LLC, visit the MN Secretary of State website and click the ‘Start a Business‘ link. Read through the information on the page and then register your business. This process is relatively simple and only takes a few minutes. Once you’ve paid the fee and completed the application, they will email you your Initial Business Filing PDF which you’ll need to establish a tax ID number or EIN. Head over the the IRS website and click ‘Employer ID Number‘ tab. Follow the prompts to apply for an EIN online. This is free. When complete, they will send you a PDF with your EIN. KEEP BOTH DOCUMENTS in a place you can find them readily! Print them out and bring them with you to your bank and open a new business checking, savings, and credit account if you wish. Going forward, receive all of your commissions and make all of your business related purchases with these accounts.

Note: if you’d like to receive your commission checks in your new LLC account, I’ll need a voided check from that account and a W9 for your LLC. 

Save for taxes! You will need to pay taxes every year. You can decide with your accountant if you pay them quarterly or annually, but make sure that the estimated amount is sitting in a separate savings account so you have it ready to pay to the IRS and MN Revenue when April rolls around. There is NOTHING worse than having to scramble to round up several thousand dollars in April when you had all year to plan for it! Save 15% of each commission check in a separate savings account and don’t touch it until your taxes are paid.

Build some wealth. The COOLEST thing about being in real estate is having the 100% control over how much money you make, what you do with it, and ability to shelter a bunch of that money from taxes by investing in real estate. As a ‘real estate professional’ you get to take advantage of some cool tax perks, especially if you own real estate. Start by deciding to save a certain percent of each commission check for building your empire. Then start reading to learn about what kind of options resonate best with you. Since we are IN real estate, it makes really great sense to me to own rental property, but that might not be the best option for you and you might not be in a good position to do so. Here are a few of my FAVORITE money books to help you learn about what to do with this money that you’re making so it doesn’t just turn into shoes and jeans. 😉

  • Total Money Makeover, Dave Ramsey. This one is GREAT for getting out of debt. It’s a quick read and very actionable. While I don’t agree with the idea of being debt free in terms of real estate (leverage is a great thing if you do it right!) his baby steps are great if you’ve got student loans, credit card debt, no savings, etc. Read this one too, it’s great to recommend to your clients.
  • Money, Master the Game, Tony Robins. This one is really interesting if you feel like the more traditional route of 401k and other stock based investments are for you. It gives a really nice perspective on investing, wealth, mindset, planning for retirement and the future, etc. It’s a long one, but worth reading for sure.
  • Loopholes of Real Estate, Garret Sutton. This is a nice overarching summary of all of the tax benefits you can take advantage of with owning real estate and being a real estate agent. It’s not very actionable, but it will give you an idea of what your options are so you can decide which will fit your lifestyle.
  • Set For Life, Scott Trench. This is a book I wish I would have had when I was buying my first house and struggling with debt. It talks about how you can use real estate to not only live for free, but build wealth and passive income to have for the rest of your life and retirement.
  • You are a Badass at Making Money, Jen Sincero. This is a GREAT money mindset book. Many of us have made a bunch of money and not put it to work for us because we don’t feel we deserve it or we don’t see money as a tool for positive growth and change. Jen is amazing at putting this all into perspective in this book which is both actionable and motivating.
  • Tax Free Wealth, Tom Wheelwright. This is another good one to help you set up a plan for minimizing what you pay in taxes each year and how to build wealth by keeping more of your income in your pocket to invest with.

Since I’m not a financial planner, accountant, tax person, etc, etc, I can’t really advise you on what to do with your money, and I don’t really want to. But I can tell you that real estate, and making money in this way where my actions result directly in growing my income (vs. just sitting in a certain place for a certain amount of time to earn a paycheck) has been a huge growing opportunity for me as a person, and a biz lady, and even as a parent and a wife. It has caused me to think about what I want to do, for real, and why I want to do it and what the point of everything is. This money will open doors and bring up new challenges that you can’t even imagine right now. And where you are now isn’t where you’ll always be so it’s important to educate yourself and ask for help where you need it so that your future self will thank you for the good decisions you make today!

When in doubt, hire it out!

Do not feel that you need to be an expert in all of this stuff. As you get to know more people in the business you’re going to be approached by insurance people, investing people, financial advisors, bank people, etc. Take some time to have conversations with these people and learn about what they do and how you may benefit from it, but make sure you really feel good about working someone before you sign up for a service. Think about the things that need to be done that you really dread doing, or know you’re not the best at, and then see if you can find someone to do it for you. In my case, hiring an accountant to do my taxes was the first step, but I quickly realized that I needed her to do my bookkeeping too because all of the information she needed was too big of a pain for me to look up. Having Sally to help me with all of this stuff, frees up my time to do the stuff that makes more money.

I’ve spoken with a bunch of financial advisors, but still haven’t found someone that I feel comfortable trusting with my money or my goals but maybe you’ve got someone you love. In my situation, I can get the info I need from books and execute the actions I need to take with online tools and it doesn’t stress me out.

I have decided to work with an insurance broker for all of my insurance needs (except health) and so now instead of me having to spend time shopping for insurance and comparing rates, I’ve got a guy who does all of that for me and then sets everything up, I’ve just got to pay the bill. This is worth it for me as insurance is not a strength.

Each of us will be different in this area. Know thyself and ask for help where you need it!

Action Items

  1. Start tracking your income and expenses on a spreadsheet or with software like Quickbooks or find a bookkeeper or accountant that can help you with this.
  2. Think about establishing an LLC and some business bank accounts.
  3. Read some books to help to learn about ways you can build wealth in your life and what to do with all the money you’re making!