Hey everyone. I am looking for some CPA, legal, or experienced advice on business write offs when investing out of state. I am currently looking at out of state investing and would like to parlay that opportunity to allow for expensed travel when visiting my girlfriends family. I was initially thinking that a LLC/partnership should be created in order to keep things clean. However, I thought it would be wise to reach out to the forums.
Any experience with out of state investing and business write offs?
What ways are the most efficient to maximize writoffs and minimize risk?
Why do so many think llcs are tax planning Tools?
Llc have that pass through provision. I think legal zoom covers it succinctly.
Since you live in the great state of CA each LLC you create will require you to pay 800 dollars to the state. This is per llc, and it doesn’t matter if it’s registered in another state or not. Isn’t that great?
Also as @Eric Adobo stated for most people llcs don’t give tax advantages. They can give liability protection (if you don’t co mingle funds with most do)
I hope you make a lot of cash flow to be able to afford that 800 dollar check to the state. Also check the laws of the state you put your llc in as they will also likely have annual fees., again per llc
It may be cost prohibitive as other have said but you can expense transportation and some meals if your trip has a business purpose. My CPA tells me in order it to count in the eyes of the IRS a day of business has to be at least 4 hours. The trip also needs to be less than 1 week to get the full transportation costs. But you could just view potential investments with a realtor which would count as business, you don't actually have to own property there. You could also do your annual meeting but would have to justify why a single member LLC annual meeting took 4 hours when you are the only attendee...
Thank you @Caleb Heimsoth for the followup. I think I fouled up the intent of the question. More about business write offs in out of state investing vs. LLC utilization. I am still new to RE investing and very new to business/finance. I was hoping to learn or be assisted on where to find more information to safely write off expenses when investing out of state. Appreciate the insight and support.
@Domenick Cava there are books for that, you can find that on BP
@Peter M. Thank you for the information. That is very helpful moving forward. I am trying to balance the legality and the efficiency for traveling/investing out of state. I appreciate the advice and your help.
@Caleb Heimsoth Thank you, just found them on the website. Did you find Tax strategies or Davide Greene's book more helpful?
@Domenick Cava I read about half David greens book. Still working on the tax book. I think you should read both but if you’re brand new to this I would start with David’s book.
I was already doing this about a year when David’s book came out so I was already learning a lot
Originally posted by @Peter M.:
But you could just view potential investments with a realtor which would count as business, you don't actually have to own property there.
Not true. The cost of researching a new property is not a deductible rental expense. These are considered acquisition costs to be added to the basis of the property.
@Eric C. If @Domenick Cava has a real estate investing LLC and he travels somewhere to work on that business, then it can be classified as a business expense. He can meet with potential clients, contractors, agents, loan officers, etc. You are right that it is not a rental expense as it would not go on a schedule E for a property already owned but it would be a deductible business expense on his tax return because it would (most likely) be set up to be a pass through entity.
@Domenick Cava , There are two issues in your question:
1) Is the travel cost a business cost?: It will depend on what do you do on your trip. if you spend most of the day looking for the house, meeting with an agent ... and other RE related stuff, travel might qualify. Maybe the better question to ask is " Will my travel still qualify as a business expense if I meet my Gf? " IRS will look at your intention as well.
2) The second issue is if these costs are deductible: This is where the complexities come in. If you travel, but you have not identified the property that you actually want to buy yet and the cost is considered investigating cost. These cost for most of the individual are considered personal in nature( unless you have RE portfolio that is run like a business- see below). If you had identified the property, the cost, the travel cost would be added to the basis of the property and depreciated.
These initial investigatory costs are treated differently for flipping and rentals
1) Flipping: the travel cost to investigate will be treated as a business cost and deducted as ordinary travel cost. This is a schedule C activity if you dont have an entity. Flipping is more than likely will be considered trade or business.
2) Rentals: For this purpose, rental are not considered trade or business, so initial inventory cost cannot be deducted as travel expenses. this travel expense is not a business expense related to the property you already own until you have identified the next property you want to buy ( once Identified cost are added to the basis as mentioned above). The reason you can't deduct travel expense before identifying a property is you report your every rental activity that you already own on schedule E. The travel expense to investigate another property is not related to the activity that you already own. And you dont have schedule C to deduct the business expense.
This might have changed if your RE portfolio was run like a business, and/or you have a partnership, the partnership would then deduct the travel expense ordinary business expense.
Like I said, it gets complicated really quick. Please talk to your CPA.
Just find a local GF - problem solved. :) Kidding, of course.
Here is a shorter version of an excellent answer by @Ashish Acharya : to deduct an expense as business expense, you need two things:
a. Have a business.
b. Have a business expense.
Creating an LLC does not mean you now have a business. Having a business for the IRS purposes requires substantial business activities with a goal of making money. If the business is renting houses - then you also need to have at least one rental property before you have a business.
Business expense means something you pay for business rather than personal reasons. Visiting your gf's family is clearly personal, even if she is involved in your business.
Reading books is a great start, but after that, you will benefit from a relationship with one of the tax experts on this forum. As Ashish pointed out, it can get complicated in a hurry.
- Travel writeoffs and out-of-state entity structures are not inherently related. Meaning...
- ... if you have a business anywhere...
- ... and you have a valid reason to travel for that business, in like with what your business does....
- ... and you have a documented, simple business itinerary for that trip drafted and timestamped before that trip...
- ... and you have a basic system to track expenses, mileage, etc. (e.g. receipt capture apps)...
- ... and you take note of things like 1) attendees at meals/meetings 2) purpose of meeting and topics discussed..
- ... and you have documentation to corroborate your 4 hours-per-day of business-related activities (such as documented/scanned copies of collateral related to an investment property you're touring...
*Disclaimer - I am not a CPA or tax/financial advisors. Please speak to one before making decisions around topics like these. Here is some tips i've accumulated from research, my CPA and my experience:
Well, my friend... then it sounds like you may have a solid business expense write-off for that trip! Then again, what do I know? Ask your CPA!
Keep it simple. This guy just wants to write off vacations.
🏨 -one or two night 👌
Food-one or 2 days 👌
🚗 or 🚌 fare-one or 2 days 👌.
Extreme ecample-your 🏡 got wiped out in a typhoon. Write off the whole 2 weeks. Sounds legit to me.
A pretty good summary, with one very important caveat: your first bullet is having a business.
If you do not have any rental properties in Texas, and you fly to Texas for whatever reason (there are many) - you do not - YET - have a business in Texas, and the trip is not deductible, period. Ditto for Cancun "to look at properties."
I got one. Thinking about or reading a 📖 does not qualify as RE investing.
No brownie points given.
@Ashish Acharya Thank you for taking the time to spell a few things out. Obviously the “it depends” answer can play a large part when dealing with the IRS but I appreciate the response and direction.
Originally posted by @Miguel Trinidad :
Good afternoon to all what is the dept to credit ratio for second investment property
If you recently acquired your first investment property, then the "debt to income" ratio will be the same as it was for your first investment property if you are using the same lender.
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