Travel expenses to look at real estate for purchase?

[Jack B.]

I'm planing a trip to Florida to look at some rental property prospects to add to my portfolio that is currently entirely concentrated in Seattle. Since I don't own any rentals in Florida but am going there to look at properties, are my travel expenses still deductible? Even if I don't buy a house on this trip? I plan on looking at several houses with a realtor while there and may very well put one under contract, however; are the travel expenses deductible even if I don't buy?

[Brandon Hall]

@William Morrison @Patrick Liska if you do not own any investment property whatsoever, your travel expenses will not be deductible. You will have to capitalize them as start-up costs and either deduct or add to the basis of the property once you actually purchase a rental.

If you already have a rental and you are travelling to explore new markets, these are considered expansion costs and will only be deductible if it involves an activity "within the compass" of your existing rental. Basically, you must incur these costs as part of the normal expansion of your business.

The IRS has consistently held that a landlord's business only exists in the geographic area of his/her current rental(s). The IRS and the tax court take a very narrow view of what defines a "geographic area."

This means that if you own rentals in CA and fly to FL to explore new rental markets, these costs are no deductible and are going to be considered start-up costs. Two tax court cases provide precedence for this view: O'Donnell v Comm'r 1962 and Odom v Comm'r TC Memo 1982.

You can listen to and believe what you want, but those two court cases will be used when you're audited and you'll be out of luck.