End of Year Tax Checklist for Realtors and Real Estate Professionals 

As the year draws to a close, it’s crucial for real estate professionals to start preparing for the upcoming tax season. The IRS considers realtors as small businesses, which brings with it many opportunities but pitfalls that can be costly. Don’t let the tax season catch you off guard; follow our checklist to ensure you are well-prepared for tax planning. By doing so, you can avoid overpaying the IRS and maximize your profits. Remember, taking the time to plan ahead is the key to success.

  1. Entity structure: There are many things to consider when determining the appropriate entity structure. Considerations include your business’s net profit, assets held, retirement options, number of partners, etc. Your entity structure is not only critical to ensure that you have limited exposure to the damage of a potential lawsuit, but it also determines your access to retirement plans such as a Solo 401k. Take the time to meet with your accountant to determine the best option for you. 

  2. Expense reporting: Expense reporting is another critical determinant to your overall tax liability. Yet, numerous real estate professionals take a lackluster approach to expense reporting. Do not make this mistake. Although your accountant is generally not required to scrutinize the truthfulness of the information you submit, if you are audited, one of the first things the IRS looks for is the date on which you documented your expenses. Expenses recorded after an examination has begun are almost always disallowed. Get your books caught up before the year’s end! 

  3. Real Estate Professional Status (REPS): REPS is a tax designation that allows real estate professionals who materially participate in their real estate business to have their losses treated as ordinary losses. This is a very convoluted area of taxation, and thus, it is essential to work with an accountant who specializes in real estate professionals as well as real estate assets. The key takeaway when establishing REPS is to document your qualifications before year-end.

  4. Cost segregation strategies: Cost segregation strategies may be one of the most important things to consider in the upcoming tax season. The reason is that accelerated component depreciation will be phased out in the coming years. Starting from January 1, 2023, full bonus depreciation will decrease by 20% each year until it is completely phased out in 2027. This means that currently, 80% bonus depreciation is available for the 2023 calendar year, 60% for the 2024 calendar year, 40% for 2025, and the last year of bonus depreciation will be 20% for the 2026 calendar year. While the bonus depreciation rules can lead to significant tax savings, these benefits won’t last forever.

If you’re a real estate professional in need of a tax strategy accountant, you can schedule a consultation here