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The following article was published in our article directory on September 11, 2012.
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Taxation for Real Estate Agents and Brokers- The Basics!

Article Category: Real Estate

Author Name: Charles H. Maness, MSACC

Calling all Real Estate Professionals! We know that you work hard and that you know your markets; but, do you know how to maximize your accounting deductions, shelter your income through retirement accounts, and incorporate to avoid or reduce self-employment taxes or Alternative Minimum Taxes?

Whether an agent or broker, the type of business structure is one of the most important decisions that you will make when starting your business. Likewise, it is one of the most important decisions to re-evaluate as you grow. The IRS allows real estate professionals to incorporate their independent practice into an entity structure. The structure can be held in any allowed entity. The most common entities for real estate professionals are Sole proprietorship (non-incorporation), Limited Liability Corporations (LLCs), Sub-Chapter Corporations (S-Corps), C-Corporations, or inside of a Trust or Retirement Account. For the independent professional, the Sole proprietorship, LLCs and S-Corporations are the most common and appropriate choices; thus, we will focus our attention to those entities in this first article of three. Depending on your choice, you will be able to shelter income and avoid or reduce self-employment taxation, maximize expenses, and gain more of the money that you work so hard to make. Entities also provide liability protections when incorporated.

Under the most basic setup, the Sole proprietorship, is basically a non-incorporated entity that may set up a tax identification number (EIN). In some cases, the real estate professionals social security number can also be used instead of the EIN. This type of election will require the owner to paid self-employment taxes on 100% of their earnings, and the agent deductions could trigger the alternative minimum tax. Most agents who are not incorporated will fall under this structure. This structure provides no benefits in sheltering income, provides no liability protections and provides no maximizing of deductions.The benefit is that the record keeping is simple.

LLCs are not true corporations. LLCs are considered a lesser form of a corporation with the purpose of sheltering liability. LLCs can be considered a sole member or partnership, or a corporation depending on the taxation election made at the setup. The IRS considers the default to be a single member LLC or a partnership for two or more members. The corporation election choice is for a S-Corp. Election of the S-Corporation requires adherence to a strict period of time; thus, we recommend that you consult a tax adviser or attorney in this matter.

The LLC and Partnership models flow directly to the owners personal taxes and are subject to the same taxation as the sole proprietorship. The S-Corporation allows the LLC to be taxed as a corporation and a business loss or gain to pass to the owner(s) personal taxes. Gains are not subjected to self-employment tax; unless taken as a salary, and will not, in itself, trigger the AMT rates. It is recommended that a portion of the gains be taken as a salary or the owner could run the risk of the IRS not allowing the corporation deductions. This would trigger all gains as personal income and something to avoid!

LLCs are the simplest entity form to manage and provides excellent liability coverage for the real estate professional. The main difference between an LLC taxed as a S-Corporation and a company set up as an S-Corporation is that the LLC holds a member percentage and has reduced record keeping; whereas, the S-Corporation has shares of stock and requires more record keeping. Essentially, the LLC allows the benefits of a member based ownership that can be any percentage and hold as many members as desired. The S-Corporation, inside the LLC, supplies the best of both worlds by supplying the tax advantages of the corporation without the strict setup requirements of the S-Corporation. We will discuss those requirements next.

S-Corporations are a true corporation. The purpose of the S-Corporation was for small to medium size business owners to reduce and streamline accounting, record keeping, and taxations costs. Benefits of the S-Corporations includes a true corporation that allows reduction or avoidance of self-employment taxes by the use of K1 distributions of profit. Likewise, deductions are not limited to cost basis for tax deductions of expenses, liability protections are present with the corporate vail, and pass through of losses may be deductible from other income received or use as a carry-over to another tax year. K1 distributions gains are not subject to self-employment taxes allowing owners to shelter more income.

The S-Corporation has IRS requirements that must considered when determining whether this entity is the correct entity for your practice. The S-Corporation is limited to 100 shareholders. If the shareholders are more than 100, the LLC or a formal C-Corporation is the recommendation. Ownership percentage and shares must be proportional and equal percentages in the S-Corporation. There is a fiduciary part to the S-Corporation where the officers must act in the best interest of the owners.

We will continue our series of structures looking at the C-Corporation in our next article and the use of self-directed IRAs, and other retirement vehicles in our final article.

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Keywords: accounting, real estate brokers, real estate agents, CPA, Tax Attorney, IRS Help, IRS, Real estate taxation, Taxation, Self-employment Taxes

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