Can I deduct $1200 expense for a property I did not buy?

Question

I incurred about $1200 in expenses in trying to buy an investment property. After many inspections, professional opinions, and negotiations, I backed out because the price was too high vs. estimated renovation costs. At the time I incurred the $1200 expense, I owned two other rental properties, so this was not exactly a "start up" cost. I do not have an LLC or any other business entity.

All the reading I have done seems to indicate that this is an expense that cannot be deducted. I can sort of understand that because I don't have a property that I can expense this against in Schedule E. Trying for a regular investment expense would not work because of the 2% rule.

So is there anything I'm missing? Thank you.

Brandon Hall · Answer

@John Pak The only time exploration costs are deductible is if you already have operations in the geographical area in which you incurred these costs. The only time you may capitalize these costs is if you later purchase a property within the same geographical area.

For instance, if I place a property under contract in Raleigh, NC and later decide to walk after I've incurred expenses, those expenses simply stay on the books until I eventually purchase a property in Raleigh, NC. I cannot subsequently purchase a property in DC and write-off or capitalize my Raleigh, NC exploration costs.

Chris Soignier · Answer

Dang, there goes my taxpayer subsidized "explore America" plan! ;)

John Pak · Answer

Sorry, forgot to add comments to the reply above.

Brandon, THANK YOU for your post. Now I understand what Linda meant earlier and how this can be done!

Linda Weygant · Answer

As usual, the answer is "it depends". Did you end up buying another property instead, or are you still waiting to purchase #3?

Based on the limited information provided, it's very likely that you can add these expenses to the basis of your NEXT property and depreciate from there.

Jason Malabute · Answer

You can only deduct or capitalize exploration or due diligence costs (like inspection fees or travel expenses for a deal) if they relate to a specific area where you already own or operate properties.

If you spend money exploring a deal in one city but end up not buying there, those costs just sit on your books — you can’t deduct them or use them to offset a purchase somewhere else.

Rohullah Sharifi · Answer

Based on the facts presented, it is my opinion that this deduction is not allowable, as there is no evidence of an active trade or business or a registered business entity, such as an LLC, in operation. The Internal Revenue Code permits business deductions only when the taxpayer is engaged in a bona fide profit-seeking activity. In the absence of an active business or demonstrable business operations, the deduction would not meet the requirements for ordinary and necessary business expenses under §162 of the Code.

Roy C. · Answer

That's fascinating. Also I didn't realize you could deduct inspection fee for investment properties.

Vincent Zhu · Answer

What it he earlier expense is in year one, and then I finally purchased a property in the same area in year two. In this case, how may I file tax then? I may have filed the tax for year one which I cannot deduct it since I may not have bought the property. In year two, since the receipt is having date in year one, can I still deduct this with a receipt in earlier year? Should I amend the tax for year one? Thanks.

Can I deduct $1200 expense for a property I did not buy?

Can I deduct $1200 expense for a property I did not buy?

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