Many real estate agents pay rent to assist in business operations. They pay for work-space at their broker’s office or rent an office outside their home. They rent tables at home shows and promotional events, storage units for signage, travel autos, leased business-use vehicles, equipment to clean and repair homes, a variety of office equipment, and the occasional home-showing bounce house.
So, how and where is this rent deducted by a sole proprietor Real Estate Agent? Like many tax deductions, the answer is messy (to say the least). This article will attempt to answer this question and clean up some of the clutter surrounding Schedule C’s Rent or Lease deduction.
Two Lines on Line 20: The Rent or Lease Deduction is composed of two sublines: Line 20a and 20b. Line 20a is entitled Vehicles, Machinery, and Equipment. Line 20b is titled Other Business Property. So precisely what gets reported on Line 20a or Line 20b? Here’s a breakdown of rents that get reported on each line, including a simple way to discern between the two forms of rent:
Line 20a Vehicles, Machinery, and Equipment: The cost of Stuff Rented for Business gets reported on Line 20a. Of course, this statement, like most-everything in tax, carries the caveat that it may be more appropriate to deduct some rents elsewhere (discussed later in this article). That said, rented stuff deducted on line 20a can take many forms, including:
- Vehicle leased for business use. Only deduct lease payments when claiming actual vehicle expenses, not the standard mileage rate. For more information on tax rules related to leasing a business auto, please read our article: Real Estate Agents, Auto Expenses: Deducting a Leased Vehicle.
- Office Equipment such as leased copiers
- Equipment rented to repair or make listed properties more presentable, such as power washers and steam cleaners.
- Items rented for trade shows, home showings, and open houses. Note: I list these forms of rent as possible Line 20a rents in our Real Estate Agent Comprehensive Tax-Cut Library. One could also argue, however, (as I do below) that such rent also qualifies as an advertising expense.
- Other items/things rented for business use
Line 20b: Other Business Property: When you consider what is deductible on Line 20b, think; Space Rented for Business Use (when, of course, not more appropriately deducted elsewhere). Here are a few common forms of rented space:
- An office (other than an office in your home). For more information on deducting a home office, please read our article series on the topic, starting with Real Estate Agents, Home Office Deduction Requirements.
- Rent paid to your broker for work-space in their office
- Storage rent for business items such as signage (other than in your home). If using a storage unit for both business and personal items, only deduct the percentage of the rent that reflects the portion of the unit used for business.
- Other forms of space rented for business (not more-appropriately deducted elsewhere).
When Rent is not “Rent”: As pointed out in other Schedule C articles and throughout our Real Estate Agent Tax-Cut Library, many line titles are not black and white. Some expenses that fit a line’s description are best-deducted elsewhere. Line 20, Rent and Lease Deduction, is no exception. So, once again, we must qualify the information provided above. All rents paid are not rental deductions, especially when it comes to items rented for promotion and advertising.
When items are rented to promote a listed home or your agent-skills, deduct the rent as advertising on Line 9 of Schedule C. Some common examples of rent deducted as advertising include:
- Rented billboards to promote your business
- Booth space at trade or home shows to advertise your business or listed properties
- Signage space in malls or other locations
- Equipment rented for marketing or promotional purposes at trade shows, home showings, or events to promote your business
In addition to advertising, some other rental costs are deducted elsewhere on Schedule C. Other rents are not deducted at all. Here’s a brief list:
- Commissions paid in addition to “rent.” For example, you rent a space at a trade show for $200 and pay the host $10 for each lead generated by the event. Since the goal of renting the area is to spur business, the $200 of rent gets deducted as Advertising on Line 8. The $10 per lead, however, is deducted as a Commission and Fee on Line 9 of Schedule C.
- Renting a vehicle while on a business trip would be more appropriately deducted as a Travel Expense on Line 24a.
- Equipment rented to make capital improvements to a property, such as a backhoe rented to dig a foundation for an addition to your office, would not be deducted as rent. Such costs must be capitalized, meaning they are added to the cost of construction and depreciated as required.
- Rent for a home that contains a qualified home office is deducted on Form 8829, Expenses for Business Use of Your Home, not Schedule C.
- Rent that conveys title. Rent that results in owning the property at the end of the lease term may not be rent. The property may be a capital asset that gets depreciated.
- Rent that is unreasonably high or low (such as a building rented from a relative at the We Love You rate) may not be deductible.
- Special Rules apply to rent paid in advance. Prepaid rent (and certain other expenses such as insurance) can be deductible on the current year’s tax return so long as the payment covers a period that extends no longer than the earlier of 1) Twelve months or 2) The end of the tax year after the tax year in which you made the payment. This is called the 12 Month Rule. If, for example, in November of Year One, Jane pays her office rent through October of the following year. All of the rent will be deductible in Year One because the rent covers a period of fewer than 12 months. If, however, Jane prepaid rent through December of the following year, only rent through December of Year One will be deductible in Year One because the prepayment covered a period greater than 12 months.
1099-MISC Tax Reporting Requirement: An important, and often overlooked, aspect of paying rent is that the payment(s) may require Form 1099-MISC when rent paid to an unincorporated individual or business exceeds $600 during the calendar year. Report rent in Box 1 of Form 1099-MISC (a topic covered extensively in our course, Form 1099-MISC Basics). Many kinds of rent require Form 1099-MISC reporting. Here’s a brief list:
- Office rent paid to the owner of the building or unit (but not if paid to a manager who sends a 1099-MISC to the owner).
- Land leases such for activities such as cell towers, farming, oil wells, and fracking
- Leased vending units, video games, or electronic poker systems
- Vehicle leases
- Lodging, conference rooms, meeting space, banquet rooms used for business activities
- Machinery and Equipment (if the rental comes with an operator, the cost of the service should be separated from rent and reported on Box 7 of Form 1099-MISC, Self-Employment Income).
The rules for sending Form 1099-MISC can be as confusing as any other aspect of the US tax code. The penalty for not sending Form(s) 1099 when required, however, makes learning the rules worth the effort. Currently, the penalty for not sending a single 1099-MISC can top $1,060 per 1099. Worse yet, the fine is indexed for inflation! Helping small business owners stay clear of these business-killing fines is why we offer a course on Form 1099-MISC in addition to our Real Estate Agent Comprehensive Tax-Cut Library.
Take Away: Rents get deducted on two lines of Schedule C, Line 20a, and Line 20b. Rent of Vehicle, Machinery, and Equipment (aka Stuff) gets deducted on Line 20a. Rent paid for Other Business Property (aka Space) is deducted on Line 20b. As with many lines on Schedule C, ask yourself “why” why you rented each item. The answer, especially if its to promote your business, may result in the rent’s deduction on a different line. Rent paid during the calendar year may require sending a Form 1099-MISC to the recipient.
Summary and Invite: We hope this article has helped you better understand the deductibility of Rents on Schedule C. If you’d like to learn more about cutting your highest cost: 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.