I couldn't find information on this in the forum or online, but heard about it on one of the BP podcasts. How do I deduct mileage expense while I'm searching for my next property? Does it matter whether or not I have made the purchase? Does it matter whether or not I quality for Passive Income Loss?
This is a great question and one that is often misunderstood. The answer, like almost anything else tax-related, depends.
Travel costs (in general) are deductible as long as they are what the IRS calls "ordinary and necessary" expenses. For a real estate investor, costs incurred when searching for properties definitely meets both those criteria. However, travel costs incurred when SEARCHING for an investment property are deductible only if you buy a property in the area you were searching.
In that case, when you buy the property (whether it be tomorrow, a week, month, or year from now), the travel costs are included in your "start up" costs, added to the property's basis, and depreciated over 27.5 years.
If you never wind up purchasing a property in the area you were searching, the costs are not deductible.
Travel costs incurred when tending to a property you already own are deductible as a normal business expense. In this case, you may be limited by passive loss rules, depending on your income, activity, and other factors. But that doesn't mean the expense is lost!
Hope this helps!
Nick Aiola, CPA
Originally posted by @Ming Ming Liu :
Does it matter whether or not I quality for Passive Income Loss?
Everyone qualifies for the passive income loss. Sometimes that loss is suspended, but you still get it. You just have to wait until you have more passive income or you sell the property to claim it.
Tom Brady got suspended for 4 games and then came back and won the Superbowl. He was still valuable, and so are your passive losses when they get suspended. (OK, that's a really awful analogy, but hopefully it helps people remember that suspended passive losses aren't a horrible thing.)
Best of Luck on your Real Estate Investing!
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