Tax deduction on due diligence

[Gaurav Bahal]

Hi,

I am starting out as out of state REI and am realizing that there is a lot of money that gets spent in doing due diligence on a out of state property. For. example airfare, lodging, property inspection, appraisal etc. and there is a chance that the deal does not go through. Is such cases am I allowed to take federal and state tax deduction on those expenses without having a LLC?

Thanks,

Gaurav

[Brandon Hall]

@Gaurav Bahalfirst, having an LLC does not grant you extra deductions. You can take the same deductions with or without an LLC so don't worry about that aspect.

Second - costs incurred to purchase a property are added to the cost basis of the property and depreciated over 27.5 years. If you currently have a rental in the area in which you are sourcing more deals, then we have an argument to deduct some of those expenses as ordinary operating expenses. However, if you don't already have a property in the area, these costs will generally be added to the basis. 

Of course, we can also elect to deduct some of these costs as start-up costs if they aren't necessarily attributable to one property. But you can't deduct start-up costs until you place a property into service, so keep track of them and close a deal!