What do you deduct on your taxes?

Question

I have a trip coming up that will be mixed personal/business.  We own a rental property in Charlotte, but I also have family in town that I will be visiting.  How do I organize this trip to make the most of my deductions?  Ex. scheduling meetings at the beginning/end of my trip, etc.

Ashish Acharya · Answer

If the taxpayer travels on business in the United States and while at the business destination extends his stay for a vacation, makes a nonbusiness side trip, or has other nonbusiness activities, the proper treatment of the taxpayer's travel expenses depends on how much of the trip was business related. The following guidelines apply [Reg. 1.162-2(b)(1)]:

• a. Primarily Business. If the trip was primarily for business, the deductible travel expenses include the costs of getting to and from the business destination and any business-related expenses while at the business destination. Personal (vacation) costs incurred while at the destination are not deductible.
• b. Primarily Personal. If the trip was primarily for personal reasons, such as a vacation, the costs of getting to and from the destination are personal (nondeductible) travel costs. Personal costs incurred while at the destination are also nondeductible. However, any business costs incurred while at the destination are deductible expenses.
•

Whether a trip is primarily business or primarily personal depends on the facts and circumstances in each case. The amount of time spent on business activities compared to the amount spent on personal activities is an important factor. While this is often regarded as a more-than-50% test, no direct IRS authority supports this approach. For example, the IRS states that a trip involving one week of business activities and five weeks of personal activities are considered primarily personal in the absence of a clear showing to the contrary

Thus,

Actual costs of travel (e.g., plane fare, cab to airport, etc.) are deductible for out-of-town business trips. You're also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they're not connected to a business conversation or other business function. As with all deductible meals, only 50% of the cost is allowed.Cant be Lavish or extravagan.

Personal entertainment costs on the trip aren't deductible, but business-related costs such as for dry-cleaning, phone calls, and rentals are.

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., for the business days are deductible—not for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each, although this isn't the sole factor.

Linda Weygant · Answer

Your tax professional is wrong.  You should report all of the income and expenses.

Your $35,000 of remodeling is very likely mostly Depreciable, not deductible.  After your net profit or loss is calculated correctly, if it's a profit, it's added to your income and taxed.

If it is a loss and your other income is over $150,000 then the net loss is not deductible.  It does, however, carry forward to the following year and will continue to do so until one of three things happens:

1.  Your income drops below $150,000.  At that point, you'll be able to start deducting your losses.

2.  You have rental profits.  At that point, your prior year losses will net against the profits to bring your taxable income for the rentals back down to $0.

3.  You sell the property.  At this point, all of your prior year losses are unlocked and you can deduct them without limitation.

After July 15th, I'd contact a knowledgeable real estate tax professional and have them amend your return.  I'd also contact your current preparer and give them the opportunity to refund your money, because between trying to deduct your remodeling all at once and not understanding about how passive losses work, they pretty much created a complete mess of your tax return.

Edited to say:The OP came back on a subsequent post to correct their understanding of what happened.  I would still check to make sure all of that remodeling was depreciated rather than deducted.  Remodel expenses before a property is in service must be capitalized and depreciated.

Kyle J. · Answer

One of the books that BP publishes (Tax Strategies for the Savvy Real Estate Investor) actually has a section that addresses this exact question.  It's been a few years since I read it, but the gist of it was - in order to be able to deduct 100% of your travel expenses (i.e. airfare,  hotels, rental car) - you must be able to show the primary purpose of your trip was for business.  (They defined "primary" as spending more than 50% of your time on business activities.)

One of the main suggestions they gave was to use the "weekend sandwich strategy".  An example of that would be flying into a town on a Thursday (travel days are considered business days), attending to actual business (meetings, conference, whatever) on Friday, taking Saturday and Sunday off for fun (non-business), and then doing business again on Monday, and ultimately flying home on Tuesday (another travel/business day).

By "sandwiching" your weekend fun activities in between business days like that, some of the expenses you incur on those non-work days can then be tax deductible too.

Obviously this is just a high level overview.  But you could read the book for more detailed info, or perhaps an actual CPA/accountant will jump in here and provide their own advice/opinion (which should be taken above mine since I'm neither a CPA or an accountant).  Or best of all, if you have a tax pro of your own that's familiar with your own unique circumstances, hit that person up and see what they have to say.

Regardless, hope this was somewhat helpful and you enjoy your trip! :)

Joe Splitrock · Answer

@Andrea Chester you can deduct whatever you want, it is more a question of whether you can defend your choice when audited. You will want to keep good records of all your meetings and time spent conducting business. Put together a log with start and stop times, detailed description of the activity, names of people you met with, etc. Whether your actions are primarily business depend on what you can prove. If all you are doing is meeting with the tenants and doing an inspection, that is a less than two hours of time. If the trip is three days, it would be hard to justify it was primarily a business trip. On the flip side if you spend all day working on rehab at the property and log 24 hours over three days, that would be much easier to defend as a business trip. Another option is to split expenses, so basically prorate the amount used for business versus personal. When we purchased our first rental property we expenses 25% of our cell phone bills. Claiming 100% for one property would have been unreasonable, considering it was also used for personal use. As we added more properties, we increased prorated amount to match the business use amount.

@Mark Collins it sounds to me like your CPA is correct, but you are misunderstanding. They are claiming all your expenses, but not claiming the rental loss against your W2 income due to passive loss limitations. You can carry over these losses and potentially realize them in a future year.

Greg O'Brien · Answer

@Mark Collins yes, that would make sense.  If you do a search of suspended losses on this forum, you can get some nitty gritty explanations!

Mark Collins · Answer

@Greg

@Greg O'Brien thanks for the response. I think the way it was explained to me was not correct.  I believe that expenses were actually deducted, however, they were limited to the amount of my revenue.  The expenses above the revenue amount weren't deducted but probably like you say "suspended" as they exceeded the revenue due to rentals being considered passive income.  Not a tax person, so trying to make sense of it.  Just got the returns on Friday back from my accountant.

Greg O'Brien · Answer

@Mark Collins that is not correct. Deductibility does not change based on your other income. The losses generated by those deductions could become “suspended” but you would still be deducting allowable expenses (inc depreciation) against rental income

Mark Collins · Answer

Just had my taxes completed.  We were shocked to find out we couldn't deduct any expenses last year from our rental.  We purchased last year, put in a significant amount into the renovation so based on revenue and expenses last year we had about $35,000 in expenses above the income from the property.  We were told because we work another job and that had income that exceeded $150,000, we can't deduct any expenses (all my travel, complete repainting, upgrade TVs, replace washer etc for our short term rental) are not reportable on our taxes.  The income however is, and we are taxed on the income without being allowed to deduct any expenses.  The only thing we can deduct are capital improvements which will be depreciated over time.  Anyone heard of this happening?

What do you deduct on your taxes?

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