Becoming a real estate agent is a daunting task. Those who receive a real estate license from their state’s Real Estate Commission, or similar governing body, have invested countless hours and a lot of money. Most are required to pay for a minimum of 60 hours of formal education before they can sit for the exam. Many candidates purchase additional study software and guides to help them prepare. Then, there’s the cost of the exam itself as well as travel to and from the testing site. All these fees add up! By the time candidates receive the formal title of Real Estate Agent, many have spent several thousand dollars training, studying, and testing!
Are these Costs Deductible? Many agents (and quite a few tax preparers) believe that these expenses are deductible on the real estate agent’s business tax return (Schedule C). Unfortunately, this is not the case. Several IRS rules remove such courses, exams, and fees from the definition of a business expense. In this article, we’ll discuss these rules and explain why such costs are not deductible when calculating a real estate agent’s taxable income.
New Business or Profession: Education expenses related to a business can be deductible if the education (1) maintains or improves skills for your current job/career or (2) are required by law to keep your status or occupation. This rule is why the cost of continuing education and other real estate training is deductible once you are licensed and actively selling real estate – they improve your real estate knowledge and may be required to maintain your license.
Education that qualifies you for a new job, trade, or profession, however, is not deductible for tax purposes. Although the costs of preparing for and taking the real estate exam often occurs just before conducting business - making them feel like business expenses - they are no more deductible as a business expense than dental school tuition paid years before opening a dental practice.
Brokers Exam and Licensing: Surprisingly, this rule also applies to tuition, costs, and fees related to a licensed real estate agent obtaining their Brokers license. The IRS has repeatedly denied these deductions, and the United States Tax Court has ruled in the IRS favor, stating that the tasks performed and skills required of a Real Estate Broker vary so much from those of a Real Estate Agent that it constitutes a new profession. Therefore, such costs are not deductible. Please see Johnson v. Commissioner and Goldstein v. Commissioner.
Business Startup Error: Current IRS rules allow most small businesses to deduct up to $5,000 in business startup costs in the first year they go into business (amounts over $5,000 need to be amortized over 180 months). Startup costs are those a business incurs before formally opening their doors to the public, including research, travel, initial advertising, employee training, and consulting. Some agents and practitioners have taken the stance that the cost of becoming a Real Estate Agent is deductible as a business startup expense, making arguments somewhere along the line that the real estate training, examination, and licensing amount to researching a potential new business. If someone tries to sell you this workaround, don’t buy it. As explained in the previous section, education, and related costs that qualify you for a new job, trade, or profession are not deductible as a business expense. Period.
Potential Tax Credit: If you obtain your real estate training at a qualified institution (as I did when I was in college) the cost of tuition may qualify for the Lifetime Learning Credit (LLC). A qualified institution is a college, university vocational school, etc. eligible to participate in aid programs administered by the US Department of Education (it includes most accredited postsecondary schools).
The Lifetime Learning Credit offers a 20% credit on the first $10,000 of qualified education expenses per student per calendar year. Qualified education expenses for the LLC are limited to the cost of tuition and required fees paid directly to the institution.
There are also income limits on claiming the Lifetime Learning Credit. Currently (2019), the credit phases out between $57,000 and $67,000 for those who are single and $114,000 and $134,000 for those married filing jointly. The LLC is not allowed for those married filing separately.
Summary and Invite: We hope this article has helped you understand why the costs of training and examination to become a licensed Real Estate Agent are not deductible and to stay clear of those who say otherwise. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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The course was excruciatingly detailed, which I appreciate. I definitely recommend this course to anyone who even thinks they may need it.- Greg, Brookfield, IL, 1099-MISC Basics Course