This article is an excerpt from The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matthew MacFarland. Pick up a copy from the BiggerPockets Bookstore!
A scenario we see quite a bit is investors owning properties in locations where they have family and friends. It is common for someone to own property in their hometown, where their parents have retired, or invest in cities where their kids and/or grandkids live.
Of course, if you own a property in a different state that is near a family member or loved one, odds are you would want to spend a few extra travel days there when visiting your property so you could have some quality time with those individuals, right? In those scenarios, how can you be sure to maximize your tax deductions as real estate investors? Let’s consider some options.
Real Life Example
We met Dave and Denise a few years ago at one of our educational Saturday brunches. They had both retired about five years earlier and started to invest in real estate almost right away. They had always wanted to get involved with real estate, but with raising two kids and working full-time, they had never really gotten around to doing it before.
They had purchased about a dozen single-family homes since their retirement and were looking to expand and buy a few more. To our surprise, Dave and Denise were not locals like most of our brunch attendees. They were actually from central California, and had driven almost five hours to Orange County to attend our brunch and sharpen their real estate skills.
Related: How to Build Wealth Now, Pay Taxes Later with a 1031 Exchange
Over the next year, they came to two more brunch events as well as a few real estate investor meetings (all in Orange County), and whenever we saw them, they would give us an update on their adventures and their grandchildren. It was a pleasant surprise when they called our office in late January and asked us to prepare their tax returns that year.
We realized that Dave and Denise were extremely organized when we got all their documents in the mail. Every property income and expense sheet was paper clipped with its respective 1099 and mortgage interest statements. Despite their great record keeping, however, we noticed that one huge thing was missing from their paperwork—travel expenses.
Dave and Denise had properties in five different states. Because they were new to real estate investing, they liked to keep track of how each of their properties was doing. It was common for them to drive back and forth between central California, Arizona, and Nevada several times a year to take care of some of their closer rentals. In addition, they drove about 450 miles round trip several times a year to attend real estate conferences in Southern California.
Even though Dave and Denise did not provide us with any travel expenses, we knew they must have had some. Just based on our casual conversations with them and their attendance at our brunch events, we knew that this was a potentially big tax saving area they might have missed.
We called Denise to ask whether she perhaps forgot to include these expenses. Not surprisingly, her response was the same one we’ve heard so many times before: “I didn’t know I could deduct that.”
We explained to Denise that any travel expenses directly related to business or real estate could be tax deductible. As long as they are visiting their rentals, scoping out new ones, or attending conferences related to real estate, pretty much all their travel related expenses could be accounted for come tax time. In short, here are some common travel expenses that can be deductible when traveling for business purposes:
- Car expenses
- Train and airfare tickets, plus any baggage fees you incur
- Taxi, subway, and bus expenses
- Real estate and educational meetings
- Overnight lodging (room service, Wi-Fi, tips, valet parking fees, even the cost of sending your suits out for dry cleaning!)
- Meals (keep in mind that this is a 50% deduction, but when you need to eat out several times a day, this expense can add up very quickly)
When we began to explain these rules to Denise, she was very adamant that these deductions did not apply to her. She explained that they strategically picked their rentals based on where their kids and grandkids lived. When they drove to Los Angeles or flew to Pennsylvania, they were visiting their properties and attending meetings and seminars, but they usually also took time to see their family. This is why Denise felt their expenses wouldn’t be deductible.
Unfortunately, this is a myth we hear time and time again. Just because you stop in to see family or friends on your way to visit a rental property, that doesn’t mean the travel cost is not deductible. It is very possible to write off your travel costs, even if you take a day or a weekend to visit with family en route.
After hearing Denise’s reasons for not sending us her travel expenses, we explained that as long as the primary reason for their trip is business, they can deduct the associated travel expenses. Furthermore, even if the primary reason for a trip was to visit family, and she spent only a little bit of time on her rental properties, some of her travel and out-of-pocket costs might still be legitimate tax write-offs.
Denise was shocked. She and Dan had been in real estate for five years and never realized how many deductions they were missing out on. She assumed that because part of their travel time was spent with family, none of their expenses could be deducted, when in reality, most of it could because the primary reason for their travel was their rentals. They often traveled if there was a problem with one of their properties, if they needed to meet someone, or they were looking for a new property. Generally, only after all the work had been taken care of would they head over to see their grandkids.
What Does This All Mean?
Contrary to popular belief, the IRS is not as terrible as one may think. A lot of loopholes are written into the tax code that taxpayers are invited to use. As you can conclude from Dave and Denise’s story, the IRS does allow tax deductions even when business travel includes certain personal benefits. As long as the primary purpose of a trip is business related, you may still write off certain travel expenses.
Many times, we’ve heard investors complain about not wanting to keep track of car and other travel costs because doing so is a hassle. However, by putting certain systems in place, your record keeping can be highly automated. Once you start really tracking your business expenses when you travel to take care of your properties, you will see how quickly they can add up. Remember, a penny saved is a penny earned, so hold on to your hard-earned money.
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