How Realtors Can Reduce Their Taxable Income Through Smart Entity Selection and Advanced Tax Planning

By The Guillen Pujol CPAs Newsroom

Real estate agents face variable income and heavy business expenses, making tax strategy central to protecting margins and long-term profitability. While deductions matter, they are only one piece of a broader, lawful strategy. Legally reducing taxable income also involves choosing the right entity, managing the timing of income and expenses, using the Qualified Business Income (QBI) deduction, and funding retirement plans that shrink today’s tax base while building future wealth. None of these strategies work without strong documentation—vehicle and travel logs, receipts, clean bookkeeping, and clear separation of business and personal accounts. A real-estate-savvy CPA ensures these tools are applied correctly and withstand IRS review.

How Taxes Work for Real Estate Agents

---

Self-employment as the prevailing model

Most U.S. real estate agents operate as independent contractors affiliated with brokerages, earning commissions rather than wages subject to employer withholding. According to the National Association of REALTORS®, 87% of members are classified as independent contractors, typically reporting their income and expenses on personal tax returns.

From there, agents select a business structure, which determines both legal liability and the way business income flows through to the owner’s tax return:

• Sole proprietorship or single-member LLC — business income is reported on Schedule C of the owner’s Form 1040, and the net profit is subject to both income tax and self-employment tax.
• Multi-member LLC or partnership — the entity files Form 1065, and each partner receives a Schedule K-1 reporting their share of the business. That income is then reported on the partner’s Schedule E, and its exposure to self-employment tax depends on the partner’s level of participation in the business.
• S-Corporation — the entity files Form 1120-S and issues a Schedule K-1 to each shareholder, whose share of pass-through income is reported on Schedule E. Shareholder-employees must also receive a reasonable salary reported on Form W-2 and subject to payroll taxes, while remaining distributions are generally not subject to self-employment tax.

Each structure comes with its own compliance obligations and creates distinct tax-planning opportunities. The most suitable choice depends on income level, growth trajectory, and how the owner plans to structure compensation.

Taxable income for real estate agents

In the real estate industry, taxable income is shaped not just by subtracting expenses from gross commissions, but by how each stream of income is structured, categorized, and reported on the return. The business entity an agent uses—and the tax rules that apply to it—can materially change the final tax liability.

The following table outlines how different business structures affect taxable income and the planning opportunities available under each model:

Business Structure	Tax Implications
Sole Proprietor / Single-Member LLC	Net profit is fully subject to self-employment tax. While easy to operate, this structure offers limited tax-planning flexibility and fewer levers—such as payroll-based QBI optimization or expanded retirement-plan contributions—that become available in more formal entity types.
Multi-Member LLC / Partnership	Tax exposure depends on the partner’s level of participation. This structure offers flexible income allocation but requires careful analysis to prevent unanticipated exposure to self-employment tax. For real estate activities, whether participation is active or passive determines how losses and deductions apply.
S-Corporation	Allows income to be split between a salary—subject to payroll taxes—and distributions, which are generally not subject to self-employment tax. This structure can enhance the QBI deduction, but requires reasonable compensation for shareholder-employees and carries additional compliance obligations.

Two agents earning the same amount can end up with very different tax liabilities depending on how their compensation is structured across the following components:

• Owner’s salary: subject to payroll taxes; setting reasonable compensation directly influences total tax burden.
• Business distributions: often exempt from self-employment tax in S-Corporations, allowing a more efficient balance between wage and non-wage income.
• Active vs. passive losses: active losses can offset other income, while passive losses are generally limited to the activity that generated them.
• Retirement plan contributions: reduce taxable income and allow tax-deferred growth, making them especially valuable for high-earning agents.

Ultimately, what counts as taxable income for a real estate agent depends on how the business is structured and how each component of compensation flows through the tax return. Understanding this framework allows agents to make informed, strategic decisions that reduce their tax liability—even without increasing their income.

Strategies to Legally Reduce Taxable Income

---

Choosing the Right Entity

Sole proprietors and single-member LLCs pay both income and self-employment tax on net profit. An S-Corporation can reduce the self-employment tax burden by structuring compensation as a mix of salary and distributions:

• A reasonable salary is paid to the owner and treated like wages, subject to payroll taxes. This salary must align with what someone in a similar role would earn, since an artificially low wage can trigger an IRS review.
• Additional distributions are taxed as ordinary income but are generally exempt from self-employment tax.

This setup often lowers overall self-employment tax liability, but it comes with additional obligations. An S-Corp is most effective when income is stable enough to justify the added compliance requirements—payroll filings, corporate tax returns, and, in some states, franchise or minimum taxes. 

Maximizing Business Deductions Without Relying on Them Alone 

Real estate agents can deduct expenses such as: 

• Marketing and advertising expenses (flyers, yard signs, digital ads, and professional photography)
• Vehicle mileage for business travel.
• Licensing fees, MLS dues, and professional memberships.
• Continuing education and training programs.
• Home office expenses (if IRS requirements are met).
• Business software, CRM systems, and productivity tools.

Strong documentation drives the effectiveness of any deduction strategy. When expenses are properly separated from personal spending, supported with digital invoices, and backed by detailed records, they hold up far better in an IRS review. Deductions, however, are only one part of a comprehensive tax plan and work best when paired with structural and long-term planning.

Depreciation, Section 179, and Bonus Depreciation

Purchases of business assets–vehicles, office furniture, technology equipment–can be deducted through: 

• Section 179:  immediate expensing of qualifying assets, up to annual limits.
• Bonus depreciation: additional accelerated write-off, set at 60% for 2025.

To qualify, assets must be used primarily for business, with sufficient proof of use. These provisions can reduce taxable income significantly in the year of purchase, but they must be applied carefully to avoid compliance issues later.

The QBI Deduction (QBI) – Section 199A 

The Qualified Business Income deduction, introduced in the 2017 tax reform, allows eligible pass-through entities–sole proprietors, LLCs, and S-Corps–to deduct up to 20% of qualified business income. Eligibility depends on income level, business type, and entity choice, and phases out for higher earners. This deduction requires careful review to ensure compliance. 

Retirement contributions

When managed strategically, retirement plans reduce current taxable income while building long-term savings: 

• SEP-IRA: contributions based on net profit; best for agents with no or few employees. 
• Solo 401(k): designed for self-employed professionals, including realtors who operate their own businesses. It allows both “employee” and “employer” contributions, enabling higher deductible amounts—particularly valuable for high earners.

Both plans share the same advantage: cutting taxable income today while deferring tax on investment growth. 

Health insurance and HSAs

Real estate agents who purchase their own health coverage may deduct premiums, provided no alternative employer plan is available. Those with high-deductible plans can contribute to a Health Savings Account (HSA), which reduces taxable income and allows tax-free withdrawals for medical expenses. 

Accountable Plans in S-Corps

An accountable plan reimburses owner-employees for legitimate business expenses—such as mileage, office supplies, and proportional home office costs—without treating them as taxable wages. Written policies and timely reimbursements are essential for IRS compliance.

For the plan to hold up under IRS scrutiny, it must include written policies, clear documentation, and timely reimbursements. When implemented properly, it lowers taxable income without increasing payroll taxes.

Timing Income and Expenses

Realtors can legally manage taxable income through timing:

• Deferring income: delaying the receipt of a commission to the next tax year, when feasible under contract terms.
• Accelerating expenses: prepaying for marketing, license renewals, or memberships before year-end so they apply as deductions in the current year.

The IRS, however, can challenge arrangements that appear artificial, making substance and documentation critical.

Cost Segregation for Rental Properties

Some real estate agents investing in rental properties may benefit from cost segregation, which breaks down property components into shorter depreciation schedules. This accelerates deductions, particularly useful in early years of ownership. Because the rules are complex, professional guidance is essential to ensure compliance and maximize the benefit of a cost segregation study.

What You Cannot Deduct– and Common Audit Triggers

The IRS maintains strict boundaries between personal and business expenses, and crossing those boundaries is one of the fastest ways to attract unwanted scrutiny. For real estate professionals, certain expenses are consistently disallowed:

• Entertainment expenses: Since the Tax Cuts and Jobs Act (TCJA 2017), entertainment deductions have been eliminated. Only 50% of properly documented meals remain deductible, provided receipts include who attended and the business purpose.
• Personal or family expenses: Clothing, vacations, personal meals, or any form of household consumption are never deductible.
• Home improvements: Only upgrades tied to a qualified home office with exclusive and regular use may apply; otherwise, they are treated as personal.
• Club dues: Memberships in social or athletic clubs are non-deductible, except in rare cases with very clear business justification.
• Fines and penalties: Traffic tickets or other legal infractions are automatically excluded.

Be aware of the audit red flags:

• Reporting vacations as business trips.
• Claiming a home office without exclusive use-evidence: photos, floor plans, or a work log.
• Declaring 100% business use of a vehicle without mileage logs or tracking apps.
• Giving client gifts over $25 without keeping records of recipient, date, and purpose.
• Logging business meals without receipts or notes documenting who attended and why.

Maintaining detailed documentation strengthens legitimate deductions and reduces costly and time-consuming audit risk.

When to Call on a CPA and How They Add Value

As income grows, so does the complexity of compliance. A CPA with real estate expertise can elevate tax planning from a simple list of deductions to a fully integrated strategy. A specialized CPA can:

• Design annual tax plans to anticipate liabilities and avoid underpayment penalties.
• Calculate quarterly estimated taxes that account for fluctuating commission income.
• Recommend the most efficient legal entity based on income level and projections.
• Implement tools such as accountable plans for S-Corps.
• Evaluate eligibility for advanced benefits such as the Qualified Business Income deduction (Section 199A/QBI).

The true value of working with a CPA lies in transforming isolated deductions into a sustainable, compliant plan—allowing real estate agents to focus on growing their business while staying fully aligned with tax law.

About Our Firm

Guillen Pujol CPAs is a Miami-based firm with more than 35 years of experience in high-income tax planning, international tax services, tax management, tax representation, and real estate advisory. We also provide outsourced bookkeeping, compliance, and controller services, along with a wide range of accounting and tax advisory solutions.

Our senior-led team has guided thousands of clients through complex regulations, from capital gains tax advisory on foreign-owned property (FIRPTA) compliance to corporate maintenance and estate planning. As leading experts among Miami CPA firms, we bring Big Four–level rigor with a hands-on approach, ensuring strategies that maximize efficiency while keeping every client fully compliant.

Take Action Now: Need professional tax guidance? Contact us today.

Planning Tomorrow, Together, with GPCPAs.

Editor’s Note: This post is part of the ‘GPCPAs Info Hub,’ an initiative dedicated to empowering you with the knowledge and strategies needed to navigate the complexities of the U.S. tax system and financial strategies. Visit our Information Hub, a curated resource offering the latest in tax, economic, and business news, alongside actionable guidance on tax strategies, accounting, and business advisory—because Planning Tomorrow starts here.

• How Realtors Can Reduce Their Taxable Income Through Smart Entity Selection and Advanced Tax Planning
• After the Shutdown: How IRS Cuts Continue Affecting Taxpayers
• IRS Tax Brackets for 2026: What Business Owners Need to Know 
• Florida’s Hunting, Fishing & Camping Sales Tax Holiday 2025: A Guide for Shoppers & Businesses
• Navigating the ‘One Big Beautiful Bill’: Implications for Global Tax Planning