Real estate brokers and agents need to obtain various licenses, permits, and numbers. Failure to obtain them can result in fines and other bad things.
What is a real estate license number?
Of course, you need a real estate license to work as a real estate agent, salesperson or broker. Each of the 50 states licenses real estate agents and brokers. Each state has its licensing agency and license requirements. To obtain a license, most states require that applicants complete a minimum number of real estate education classroom hours and pass a licensing examination.
Unfortunately, you cannot deduct education expenses you incur to qualify for a new business or profession. This means you cannot deduct the costs of the education courses you take to help prepare for your state’s real estate license exam. Nor is the exam fee deductible.
This rule applies even when a licensed real estate agent, salesperson or sales associate pays for education to pass the state exam to become a real estate broker. However, real estate agents and brokers may deduct the cost of undergoing mandatory continuing education to maintain their licenses.
What about a state business license number?
A few states require all businesses to obtain state business licenses. Such licenses are also called general business licenses. Real estate brokers in these states will need to get them in addition to their real estate licenses.
The fees for such licenses are tax deductible.
What are the local license requirements for real estate agents?
Many cities, counties, and municipalities require business licenses or permits for all businesses. Usually, you have to pay a fee to get such licenses. They are merely taxes in disguise. Other cities have no license requirements at all or exempt micro-businesses. The fees for such licenses are tax deductible.
If you’re doing business within a city’s limits, you’ll need to contact your city government to find out about licensing requirements. For agents in an unincorporated area, you’ll need to contact your county government. If you’re doing business in more than one city or county, you may have to get a license for each one.
To find out what to do, contact the appropriate local official in charge of business licensing. This is often the city or county clerk, planning or zoning department, city tax office, building and safety department, or public works department. You may need more than one local license, so you may have to deal with more than one local agency.
To obtain a license, you’ll be required to fill out an application and pay a fee. Fees vary by locality, ranging from as little as $15 to several hundred dollars. Fees are often based on your projected gross revenues (for example, ten cents per $1,000 of revenue projected). Periodically, you’ll be required to renew your license and pay an additional fee, usually every year. You also may be required to post your license at your place of business.
Are there federal licensing requirements for real estate agents?
Real estate professionals and others offering interstate land sales of 100 or more lots must register with the federal Housing and Urban Development Department (HUD) unless they qualify for one of the available exemptions. Offerings that have 25-99 lots that are part of a common promotional plan are exempt from registration but are subject to federal antifraud provisions.
Employer Identification Numbers (EINs)
In addition to state and local licenses, you may need to obtain an employer ID number. A federal employer identification number, or EIN, is a nine-digit number the IRS assigns to businesses for tax filing and reporting purposes. The IRS uses the EIN to identify the taxpayer.
When an EIN is required
Use your EIN on all business tax returns, checks and other documents you send to the IRS. Your state tax authority may also require your EIN on state tax forms.
Sole proprietors: If you’re a sole proprietor, you must have an EIN to: hire employees, have a Keogh or solo 401(k) retirement plan buy or inherit an existing business that you operate as a sole proprietorship, incorporate or form a partnership, or file for bankruptcy. Also, some banks require you to have an EIN before they set up a bank account for your business.
You can obtain an EIN even if it is not required, or you can use your Social Security number. Also, if you don’t have to get an EIN, you may wish to do so anyway to help avoid identity theft. Theft of taxpayer’s identities has become a widespread problem. Identity thieves steal taxpayers’ Social Security numbers and use them to file fraudulent tax returns and obtain tax refunds. For this reason, it’s wise to keep your personal Social Security number as private as possible. Obtaining an EIN allows you to avoid having to provide your Social Security number to members of the public.
Corporations, partnerships, and limited liability companies: You must have an EIN if you form a corporation, partnership, or limited liability company, even if you were formerly a sole proprietor.
Obtaining an EIN
EINs are free and easy to obtain. You can get one by filing IRS Form SS-4, Application for Employer Identification Number, with the IRS. Filling out the form is simple; just follow its detailed instructions. Note these possible trouble spots:
- Space 1: List your full legal name if you’re a sole proprietor. If you’ve incorporated, list the corporation’s name: the name on your articles of incorporation or similar document establishing your corporation
- Space 7: Leave this space blank if you’re a sole proprietor
- Space 12: For most self-employed people, the closing month of the tax year is December, the last month of the calendar year
- Box 13: If you don’t plan to hire any employees, enter “N/A” in this space
The fastest and easiest way to obtain an EIN is to apply directly through the IRS website and clicking “Employer ID Numbers (EINs).” You can fill out an interview-style online application. As long as you pass the system’s automatic validity checks, you will immediately be issued an EIN. If your application doesn’t pass the validity checks, you will have the opportunity to review and correct it.
Otherwise, simply print out a copy of the confirmation notice for your records and begin using your new EIN immediately.
Applying by mail or fax
If you do not want to apply online, you can obtain your EIN by mailing a completed SS-4 to the appropriate IRS service center listed in the form’s instructions. The IRS will mail the EIN to you in about a month. You can also apply by faxing the completed SS-4 form to your state’s fax number. The IRS will fax back your EIN within four business days.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.