Working as a real estate agent keeps you updated with property-related tax laws, documentation, and the investment market. Working with a wide range of clientele, from investors to first-time home buyers to business owners, real estate agents become professional in handling property transactions. However, when it comes to accounting for their business, many leave it to the end of the tax year. It is the biggest mistake real estate agents make. And if you do it too, then this article is for you.

The Need for Accounting for Real Estate Agents

Real estate agents are sole proprietors, a one-person army, always on the field doing multiple tasks, from selling and renting property to handling maintenance and repair. Many real estate agents also help tenants shift their belongings or do some painting and repair work and earn referral fees. It is a business of a few incoming transactions of large amounts and several small expenses such as advertising, travel, meals to clients, and more.  

Being a sole proprietor there is no guarantee of regular cash flow. In some months, you might earn a hefty commission; in others, you may barely make ends meet. However, the show must go on. And accounting can help you run the show efficiently.

How to Get Started with Accounting

Reporting Income for Real Estate Agents

Real estate agents wear many hats and deal with multiple people, from contractors to partners to employees. Often, the income is earned from various sources like commissions, bonuses, and even gifts. Many transactions are complex as the amount credited to your account as the commission may not be your actual income. The rent collected may be on behalf of the landowner.Accounting for such transactions would be different, and it is essential as that could affect your tax liability.

For instance, John collected commission from the tenant and shared half of it with his partner broker. In this case, he will add the full commission as income earned and record the amount paid to the partner as an expense. How the expense will be categorized depends on whom he is sharing the commission with – brokerage, other agents, or employees. If he fails to deduct this expense from the commission, he will pay tax on a higher income. Hence, it is better to update the accounts when the transaction happens rather than wait till the end of the year.

Moreover, detailed accounting brings clarity around such complicated transactions that could lead to disputes if unaccounted for.

Reporting Business Expenses for Real Estate Agents

The next step is to report expenses incurred to make property sales. It means recording everything from the vehicle mileage used to drive to the client’s place, sharing a meal with them, sending them a Christmas card, and advertising and marketing the property. While recording these transactions, you must safely keep the receipts because you can deduct all these expenses from your taxable income.

The best way to record these expenses is by using a separate bank account for all business-related transactions. Whenever you pay for a meal with a client, consider swiping your business credit card instead of your personal credit card. That would make things easy.

Types of Business Expense Deductions

Now for the expenses you can deduct from your taxable income:

  • Licensing and membership fees for professional organizations like the Canadian Real Estate Association (CREA).
  • The amount spent on improving business skills, courses, seminars, and workshops for digital marketing, real estate laws, or obtaining specialized training that could help you perform business better.
  • Vehicle-related expenses include gas, car maintenance, insurance, interest on vehicle loans, and leasing expenses, if any. If you use your vehicle, you can only deduct the amount used for business travel. This means you will have to maintain details of your business trips, including the date, origin, destination, purpose, and distance travelled. Some apps help you record mileage.
  • 50% of the amount you spend on meals and entertainment is spent on networking or building relationships.
  • Suppose you have occupied 20% of your home as an office. In that case, you can deduct 20% of heating and electricity, property taxes, and mortgage interest as home office expenses, provided you keep those bills safe.
  • The amount spent on newspaper advertisements, brochures, business cards, and other marketing and advertising expenses to increase sales.
  • Fees paid to accountants, bookkeepers, lawyers, and other professionals for financial or legal services related to the business.
  • Capital Cost Allowance on equipment or vehicles purchased for business purposes, wherein you can deduct depreciation for several years. 

While these expenses look easy, each has several eligibility criteria and calculations when claiming tax deductions. A professional accountant can help you file the deductions correctly.

Tax Planning for Real Estate Agents

Being a real estate agent, you must plan your taxes. To file taxes, you must prepare an income statement, cash flow, and balance sheet. Just reporting the income and expenses is not enough. You also need the receipts to prove them if the CRA comes knocking. The CRA requires you to save the receipts for at least six years.

Given that commissions are volatile, keeping 10% of your income aside for tax payments is better to avoid facing a significant tax bill at the end of the year. You must also pay advance tax every quarter based on the expected income for the year. Moreover, you become eligible for Goods and Service Tax (GST) if your revenue exceeds the $30,000 threshold in a single calendar quarter or four consecutive quarters.

An accountant can help you plan and file your taxes accurately while complying with all legal requirements, such as detailed transaction records and descriptive information about your clients.

Financial Planning and Cash Flow Management for Real Estate Agents

Regularly updating your books of accounts and reviewing your financial statements can give you financial insights about your business. It can help you understand your expenses and keep a cash reserve to meet them. You can also analyze your cash situation, plan for taxes and other unavoidable expenses, invest the surplus, and make a data-driven decision before buying a business asset.

Contact Black and Gill LLP in Etobicoke to Help You with Accounting Services

A professional accountant can help you align your finances and plan taxation, cash flows, and business expansion. There is more to tax filing, accountants and bookkeepers at Black and Gill LLP can offer. To learn more about how Black and Gill LLP can provide you with the best accounting and bookkeeping expertise, contact us online or call us at 416-477-7681 to learn more about how we can help you and your business.