As mentioned before, there are two main ways to be paid as an real estate agent. You can either work solo or with a team. Either way, you will need to know how agents get taxed when they earn money from your business.
As a self-employed individual, you’re responsible for paying tax yourself. This means that you’ll have to claim all of your deductions and expenses using appropriate paperwork and receipts.
It gets even more complicated if you do choose to run your own firm instead of working alone. Because you’ll now have employees, you’ll also need to pay employment taxes such as income tax, NICs (non-concessionary benefits) and payroll tax.
This article is going to take a look at some key points about agent taxation so that you’re fully aware of what happens to your earnings.
Capital gains tax
When you sell an asset, like a house, you can be taxed on how much you sold it for. This is called capital gain tax or even higher depending on what country you are in, your income and how much of the profit comes from investing in real estate.
In Australia, we have two different types of capital gain tax. In the simple case, there is no additional tax if the sale price is less than half of the cost to buy the property. If the price is more than this, then there is usually no extra tax unless you make more than $2 million per year as an individual.
Transfer duty
When you sell your house, there is an additional tax that must be paid called transfer duty. This is typically done through real estate agents but it can sometimes be done directly from the seller or buyer.
The amount of transfer duty depends on two things; how long you own your current home for and what country you are selling to. In some countries, like Australia, they require a minimum number of days to define your residence so the exact number of days does not matter. However, in most other countries, such as Canada and United States, the length of time you live in your current home will determine how much transfer duty you pay.
There are different rates of transfer duty depending on whether you’re buying or selling a property so make sure to check these out before investing!
As mentioned earlier, direct sellers may skip this stage if they manage their sale themselves. That being said, as a seller who sells via agent, it is important to know about transfer duties.
What people often don’t realise when buying a house is that you have to declare the value of the house you’re moving into on your income and asset declaration forms. The cost of this usually gets excluded under ‘Transfer costs’ but it’s better to know where it fits instead!
In fact, many buyers I talk to never include the value of their new home in their expenses because they feel it has already been accounted for.
Property management companies
As mentioned earlier, not all agents are taxed in the same way. Some are fully self-employed and therefore pay tax only on their earnings, while others work for a broker or firm that covers most of the costs but they are still liable to income tax.
However, one of the least known types of agent is what we call a property manager. A property manager represents a landlord who rents out an apartment or house to another individual or business. They take care of collecting rent and paying bills on behalf of the owner, as well as ensuring that the premises are in good order.
Landlords can choose whether to hire a full time property manager or use part time ones at either their own home or someone else’s. In either case, the person hired will usually be given access to both the owners documents and the rental property so they know everything about it. This means they can do routine checks, make sure there aren’t any safety issues and perform other basic maintenance tasks.
Letting agents
As mentioned before, letting agents are not always considered professionals due to them not being regulated by law or regulation. However, they still need to deal with their share of tax as let themselves be known as ‘real estate agent’!
The term real estate agent usually includes two different types: those that work for an individual seller and those that work for a property management company. The latter is what most people associate with buying a house.
However, the former is where it gets tricky. An individual seller doesn’t necessarily have a professional representative to help them sell their home, so they turn to online advertisements or go directly to the media to advertise their house/property for sale.
This can sometimes backfire when both the advertiser and the potential buyer consider each other’s cost-effective approach irrelevant in the selling process. Sometimes sellers feel like they’re being tricked into paying more than they should because of no representation.
Tax credits
One of the most important things to know about real estate agents is how they are taxed. Just like you, your agent is paid through his or her commission which comes from the sale of your home or property. But what kind of income does he or she have?
Agents typically receive an additional amount called a tax credit. A tax credit can be for anything including business expenses, mortgage interest, or even charitable donations. Some countries/states offer more generous tax credits than others so make sure to check before investing in expensive marketing materials!
The difference in taxation between having an accountant and not having one depends on whether or not you are liable for personal taxes as well. If you are married or partnered with someone else, then it is better to be part of a team because you both would pay separate personal taxes but as individuals, you would probably get charged twice for the same thing.
So stay within budget boundaries and if you need to spend money to promote your business, do not overdo it otherwise you will lose out on valuable tax breaks.
