It is always fun to buy your first house, until Uncle Sam tells you to part ways with money in exchange for his services. 💸 Simply put, your real estate income is recognized by the Internal Revenue Service as business income, and this opens the new chapter in your tax planning process. You can forget about the W-2 and become a business person who will need to report every transaction that your business made with high degree of detail.
Income is reported via Schedule C or the Profit or Loss from Business form. This is the form where your total income and business expenses are accounted for. Net profit from this form will be taxed. Therefore, reducing the amount on this form can save you some money.
The positive thing about having a business yourself is the opportunity to deduct some of the business expenses in order to reduce the tax liability. Such expenses include MLS fees, error & omissions insurance premium, advertising, car mileage for business purposes. Take pictures of all the receipts you will need in case of the audit. Actually, you should keep receipts of all transactions you make, including buying a cup of coffee at your business meeting.
Do not forget about self-employment tax in addition to regular income tax. It includes your contribution to Social Security and Medicare, for which you would pay only half of the regular fee if you worked somewhere else before. You will need to pay estimated tax quarterly in order to avoid the penalties in April. Allocate 25-30% of your commissions for such payments.
Having a house of your own is a great achievement, but proper tax payment will protect your investment.