Real Estate Agent with W2 income

[jabrock1]

Hi,

I got my Real Estate License during 2019.  I have now been licensed for about 6 months.  I also work full time at a W2 job.  I have incurred a decent amount of expenses this year while getting my license.  Can I offset these expenses against my W2 income? 

Thanks

[Rainman12]

You MAY be able to deduct Some expenses under 'Lifetime Learning Credit' rules. "You can deduct tuition-related expenses paid while you were completing state-required real estate courses to obtain your real estate agent or broker’s license, if you completed the courses at an eligible educational institution. If you attended a college, university or vocational school that is eligible to participate in federal student aid programs with the U.S. Department of Education, the school is an eligible educational institution under the federal tuition and fees deduction." https://www.irs.gov/forms-pubs/about-form-8863 

You can Not deduct as 'Employee Expenses', or 'Business Expenses' since you have no related income.

[Anonymous]

if the statutory employee box on your W-2 is checked income would then go to schedule C.    your related expenses would also go on schedule C.   if its not checked, you are an employee.   Recent tax law changes bar deductions for employees. 

in any case, expenses incurred to get licensed to perform work, is not deductible - ever.   after you have a license expenses to maintain it would be deductible as stated above.  

[Carl]

You can not take deductions for W-2 job related expenses. Period. Basically, you just have to "suck it up" and that's that.

However, if you made any sales commissions during the year that will be reported to you on a 1099-MISC in box 7. That particular income is self-employment income and gets reported on SCH C. So you "may" be able to claim some of your licensing expenses as a business expense on SCH C.

Note also that if you have W-2 income and the "statutory employee" box is checked on that W-2, then that specific income is actually self-employment income that also gets reported on SCH C. (You just enter the W-2 like you would any other W-2 into the program, and with that statutory employee box checked, the program will "know" this is SCH C income.)  Then you can claim any expenses related to "that" income on the SCH C.

Note also that even on SCH C there are some expenses you would think you can claim, but you can not. For example, education required to maintain or improve an existing job skill is a qualified deduction on SCH C. However, if the education was to qualify you for a new trade or business, then it's just flat out not deductible.

[Spino]

Not exactly. However you can open a business, sole proprietorship, on schedule C, for your real estate activities. You can declare all independent contractor income (referrals, contract work, etc.) on this schedule C along with expenses relating to your business activities--but not your employment.

Any time you are declared an employee, you are then very limited in your ability to deduct expenses, which are believed by the IRS to be the responsibility of your employer.

There are times when you might receive W2 income for work you did as part of your sole proprietorship Schedule C business, but it doesn't sound like that is what you are asking about.

Assuming you deduct the expenses of being in the real estate business (not of qualifying to enter the business), remember that the IRS expects you to actually make money doing this business, and specifically at least 3 out of any 5 years should show a profit.

[jabrock1]

Thanks for the feedback.  Just to clarify, if I was to close a deal in the next month for a $5000 commission, I could then offset that income with expenses incurred?

[TomD8]

You'll probably get a 1099-MISC at year's end for your real estate income.  You'll report that income and your allowable real estate expenses on Schedule C of your tax return, and you'll be taxed on the net. 

Expenses related to your W2 job, as others have said, are NOT deductible at all.

So keep good records of your real estate business expenditures.

Be aware that taxes are NOT withheld from 1099-MISC income, so you'll have to pay quarterly estimated taxes once you started earning commissions.  And be aware that 1099-MISC income is considered self-employment income, so it will be subject to the self-employment (SE) tax, as well as ordinary income tax.  The SE tax is for Social Security and Medicare.