Running a real estate business, whether it be flipping, wholesaling, or landlording, often requires plenty of travel. Whether by car or plane, costs can add up. You have probably wondered before how (if) you can deduct your transportation expenses. The answer to that question is the classic CPA answer: it depends.
Deductibility of travel expenses first depends on where you are traveling. Specifically, you must determine whether you are traveling “locally” or “non-locally,” which requires you to understand what your “tax home” consists of. Your tax home is the general area in which your principal place of business occurs for your rental activities. This can be where the property is located, or where your primary residence is located.
For instance, I live in Washington, D.C. and own a rental in North Carolina. My primary place of business for that rental activity is Washington, D.C. because that’s where the business is actually conducted by the owner (me).
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Local Travel (Inside Your Tax Home)
If you are traveling to a rental that is located in your tax home, there are stringent guidelines to follow to determine whether or not your travel costs are deductible. If you have a home office, travel costs between your home and rental will be deductible.
However, if you do not have a home office, you will be subject to the commuter rule. Commuting expenses are personal expenses and therefore not deductible in your rental business. If you do not have a home office, the IRS takes the stance that your rental property is your “office,” and therefore you are simply commuting to and from work.
To get around this, if you don’t have a home office but work a W2 job, go straight to the rental after work, as you will be traveling from your main office to your second office, a deductible business expense. Additionally, once you reach the rental (whether you came from your home or not), you may deduct all travel expenses related to the rental activity. So if you run to the hardware store, that trip is deductible.
Non-Local Travel (Outside Your Tax Home)
For tax purposes, you may deduct virtually all of your travel expenses related to travel outside of your tax home. There are two key criteria to deduct this type of travel: you must travel outside your tax home and you must stay overnight at least one night. If you do not stay overnight, the trip is not considered “travel.”
The travel must be ordinary and necessary for your business, meaning during your trip, your rental business needs to be top of mind. You must also spend more than half of your trip working in or on your business in order for your transportation expenses to be deductible. If you spend more days on a personal vacation than you do working on your rental business, your expenses will not be deductible.
You may not deduct travel costs incurred before you are actually in business. These costs will be treated one of two ways: they will be added to the basis of the property once purchased or deducted as a start-up cost once you are in business. Travel costs incurred as a result of a successful trip (meaning you bought a property as a result) are added to the basis of the property and depreciated over the life of the property. Travel costs incurred as a result of unsuccessful trips will accumulate and be deducted via start-up expenses (limited to $5,000) once you are actually in business.
What Expenses Are Deductible?
Your expenses may not be lavish or extravagant related to the business you are operating. For most of us, that means we can’t deduct the cost of a first class ticket or the lodging costs of the penthouse suite. That said, you can deduct ticket fares for airplanes, trains, or buses. You can also deduct the cost of luggage and public transportation.
You may deduct 50% of your meals if a business conversation occurred immediately before, during or after the meal. You will have the burden of proof, so make sure to always keep your receipt. You may also deduct 50% of your entertainment expenses; however, you will likely need to prove to the IRS that the entertainment was justified by the business you run. Typically as landlords, we’d have a hard time justifying entertainment expenses.
You may also deduct the costs of telephone, internet, laundry, computer rentals, and tips paid to various vendors.
Keep Solid Documentation
You need to create a paper trail. Travel and transportation expenses are an area IRS auditors love to target because they are easy to overstate. The burden of proof will be on you, the taxpayer, to prove to the auditor that you did indeed incur such costs.
Some key ways to do this will be to accept business cards of the individuals you meet with. You can also keep a daily log or calendar and write on them what you did each day during your travel. I’d also suggest that you keep agendas of meetings you attend, as well as copies of rental related correspondence.
You should also keep receipts for meals you plan on deducting. On the top of the receipt, write the name of the person you met with, what their role in your business is (i.e. property manager, contractor, realtor), and jot down a note or two about what your discussed immediately before, during or after your meal.
In terms of mileage, be sure to write down the odometer reading at the beginning of the year (this is key). Each time you travel in your vehicle, you need to record the date, beginning address, ending address, purpose of trip, who you met with (and their role in your business), and mileage incurred. I tell my clients not to sum mileage into a “round trip” and rather report each trip individually. For example, instead of saying “roundtrip point A to point B was 20 miles,” you should say “point A to point B was 10 miles” and “point B to point A was 10 miles.”
I hope this helps shed some light on deducting travel related expenses. The key is to understand the difference between deducting local and non-local travel and to keep bulletproof documentation.
Investors: Have any questions about what you can deduct when it comes to travel expenses?
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