Most commercial real estate brokers are independent contractors. They receive 1099 compensation and are not a W-2 employee of their brokerage firm. Another term for an independent contractor in real estate is a Qualified Real Estate Agent (QREA).
QREA is the term used in the tax code that allows you to hang your real estate license at a brokerage firm but not be considered an employee. This is an excellent arrangement because you can benefit from the opportunities of a small business owner.
Deducting expenses, significant retirement account contributions, and lowering taxes are opportunities for a small business owner. It is even better for the CRE broker whose small business does not have any employees other than the broker and possibly their spouse.
To truly experience the greatest opportunity for tax savings, you need to form an entity and elect S Corporation tax status. This structure gives you the ideal environment for receiving income. However, consider a few nuances before you ask an attorney to create an entity for you.
You can form many different types of entities, but each state may have its own requirement for which types can be used for real estate agents. For example, you can use a Corporation, LLC, Partnership, or LLP in Florida. In California, you can only use a Corporation, but in Georgia, you can use any type of entity. And a few states do not allow an entity to be used at all.
The next nuance is the real estate licensing requirement. Some states require the entity to hold the license, and it could be a specific type of real estate license. For example, in Illinois, the individual can hold any kind of real estate license, and it does not have to be transferred to the entity. On the other hand, only a broker license can be used in Texas, and it must be transferred to the entity. Finally, in Florida, any type of real estate license can be used, but it must be transferred to the entity.
If the license must be transferred to the entity, your state may have specific naming requirements for the entity. For example, in Florida, your entity name must match the name on your real estate license for it to hold the license.
We’ve helped many brokers navigate this process throughout the country and have seen situations where an entity was formed before our conversation and had to be closed due to licensing or naming issues.
Ask a more senior colleague in your office about these rules in your area, or give us a call.
