7 Mistakes New Brokerages Make in Their First Year

Starting a real estate brokerage is exciting, but the first year is also when tax mistakes can quietly drain your profits. Many new owners focus on listings and commissions, only to face surprise tax bills, penalties, or missed deductions. This guide outlines the seven most common tax mistakes new brokerages make, and gives you concrete steps to avoid them. Fix these now, and you will keep more of what you earn.

Mistake 1: Choosing the Wrong Business Structure

Many new brokers start as a sole proprietorship or a simple LLC without thinking about tax implications. A sole proprietorship means you pay self-employment tax on all net income, which is 15.3% in 2026. An LLC taxed as an S-corp can save you money on self-employment tax, but it requires payroll and filing a corporate tax return.

What to do this week:

• If your net income is likely to exceed $60,000, talk to a CPA about electing S-corp status.
• If you are already operating, you can still change your structure before year-end, but it is easier to set it up correctly from day one.
• Consider a partnership if you have a co-founder, but have a written partnership agreement that spells out tax allocations.

Mistake 2: Not Tracking Mileage from Day One

Real estate agents and brokers drive a lot. In 2026, the IRS standard mileage rate is 67 cents per mile. If you drive 1,000 miles a month for business, that is $670 a month in deductions, or over $8,000 a year. But if you do not track your mileage, you lose that deduction.

What to do this week:

• Download a mileage tracking app like MileIQ or Everlance. Most cost $60-$100 per year.
• Start logging every business trip immediately. Include the date, purpose, and miles.
• If you have already missed months, reconstruct your mileage from your calendar and email records. It is better to have a good estimate than nothing.

Mistake 3: Mixing Personal and Business Expenses

When you start a brokerage, it is tempting to use the same credit card for everything. That makes bookkeeping a nightmare and can trigger an audit. The IRS expects clear separation between personal and business expenses.

What to do this week:

• Open a separate business checking account and a business credit card. Many banks offer free business checking with no minimum balance.
• Use only those accounts for business expenses. Pay yourself a salary or draw from the business account, but never pay personal bills from it.
• If you have already mixed expenses, go through your statements and categorize every transaction. Use accounting software like QuickBooks ($30-$80/month) or Xero ($35-$70/month) to keep it clean going forward.

Mistake 4: Forgetting to Pay Quarterly Estimated Taxes

As a self-employed broker, you are responsible for paying taxes on your income throughout the year. The IRS requires quarterly estimated tax payments if you expect to owe more than $1,000 in tax. New owners often skip these, thinking they will pay at year-end. Then they face underpayment penalties and a large April bill.

What to do this week:

• Estimate your 2026 net income. A safe rule is to set aside 30% of every commission check for taxes.
• Use IRS Form 1040-ES to calculate your quarterly payments. Deadlines are April 15, June 15, September 15, and January 15.
• If you have missed a payment, make it as soon as possible to reduce penalties. The penalty is based on how much you owe and how late you are.

Mistake 5: Overlooking Home Office Deductions

If you run your brokerage from home, you can deduct a portion of your rent, utilities, and internet. The simplified method gives you $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500. The regular method allows you to deduct actual expenses based on the percentage of your home used for business.

What to do this week:

• Measure your home office space. It must be used exclusively and regularly for business.
• Calculate the percentage of your home’s total square footage that your office occupies.
• Keep records of your rent or mortgage interest, utilities, and home insurance. The regular method often yields a larger deduction, but it requires more paperwork.

Mistake 6: Not Understanding Commission Splits and 1099s

If you work with independent contractor agents, you must issue them a 1099-NEC at the end of the year if you paid them $600 or more. Many new brokers forget this and face penalties of $50 to $280 per form. Also, if you receive commissions from other brokers, you need to track those for your own tax reporting.

What to do this week:

• Set up a system to track all payments to agents and contractors. Use a simple spreadsheet or your accounting software.
• Collect W-9 forms from every agent and contractor before you pay them.
• At year-end, file 1099s with the IRS and send copies to the agents. You can e-file them through services like Track1099 or Tax1099, which cost $2-$5 per form.

Mistake 7: Ignoring State and Local Tax Obligations

Federal taxes are not the only ones you owe. Most states have their own income tax, and many cities or counties have business license taxes or gross receipts taxes. New brokers often overlook these, leading to fines and interest.

What to do this week:

• Check with your state’s department of revenue to see what taxes apply to brokerages. Some states, like Texas and Nevada, have no state income tax but have franchise or gross receipts taxes.
• Apply for any required business licenses. Fees range from $50 to $500 depending on your location.
• If you have employees, you also need to register for state unemployment tax and workers’ compensation. This is a separate process from your federal EIN.

FAQ

Q: Can I deduct my car if I use it for both personal and business? A: Yes, but you can only deduct the business portion. You can use the standard mileage rate (67 cents per mile in 2026) or actual expenses. Keep a log to prove your business miles.

Q: What is the penalty for missing a quarterly estimated tax payment? A: The penalty is based on the amount you underpaid and the number of days late. It is roughly the federal short-term interest rate plus 5%. For 2026, that is around 7% per year, but it can add up quickly.

Q: Should I hire a CPA for my first year? A: Yes, especially if you are not familiar with tax laws. A CPA can help you set up your structure, track deductions, and avoid costly mistakes. Fees range from $200 to $500 per hour, but many CPAs offer a flat fee for small business tax preparation, typically $500 to $1,500 per year.

Q: What if I make a mistake on my tax return? A: You can file an amended return using Form 1040-X. You have three years to amend. If you owe more, you will pay interest, but penalties are lower if you file the amendment before the IRS contacts you.

Related guides

• S-Corp vs LLC for New Brokerages: Which Saves More on Taxes?
• Tax Deductions for New Brokerages You Are Probably Missing
• Tax Write-Offs for New Brokerages: The Complete List

The bottom line

Your first year as a brokerage owner is about building a foundation, and that includes your tax strategy. Avoid these seven mistakes, and you will save thousands of dollars and a lot of stress. Start with the basics: separate your finances, track your mileage, and pay your estimated taxes. Then work with a professional to optimize your structure and deductions. The time you invest now will pay off for years to come.