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Travel expenses to look at real estate for purchase?
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?
I'll let the CPA experts chime in to verify.
From my experience, the answer is YES. Your plan is to go for business. If you took a day to relax, then the expenses on that day would not be deductible. But your flights to and from are.
Have you scheduled the appointments to look at the houses already ? if so, then you can deduct the expense no problem. that should satisfy an audit from the Tax man. if you just go there and then look, they will not consider that a business trip, there has to be a pre-planned reason. If you do that, yes it is deductible - flight, lodging, meals, car rental. I am not a CPA, but i would consult with one to make sure.
@Jack B. @Jesse LeBlanc @Patrick Liska these costs are non-deductible because Jack does not yet own property in FL. Doesn't matter who you schedule with or meet with, if you don't already own property in FL, then you are deemed to not be in business in FL so you do not have a business reason to travel to FL.
Once you close on a property, all prior travel and exploration costs will be added to the property's basis and depreciated over 27.5 years.
Hi Jack, if you are using your business account to purchase the trip and other essences there, it is easier to classify as business expense. Moreover, save the itinerary of the properties you saw there ( even MLS printouts) as a proof. I think this would work.
Originally posted by @Brandon Hall:
@Jack B. @Jesse LeBlanc @Patrick Liska these costs are non-deductible because Jack does not yet own property in FL. Doesn't matter who you schedule with or meet with, if you don't already own property in FL, then you are deemed to not be in business in FL so you do not have a business reason to travel to FL.
Once you close on a property, all prior travel and exploration costs will be added to the property's basis and depreciated over 27.5 years.
So Brandon if you travel under an entity like a LLC or S-Corp, it's non-deductible?
@Brandon Hall, that does make some sense because all expenses are related to a property, not a business where you would file a schedule C. If you are filing a Schedule C however, wouldn't that be a business expense ? you need to run the business and travel for it.
@Patrick Liska business expenses available to Sch C businesses are also available to landlords, so that's not the issue but that's a great observation.
Think about it this way. What if @Jack B. took three trips? How about 20? At what point, if he doesn't purchase a rental, do the travel expenses really become personal rather than business?
That's the point of the rule. You can document all the trip expenses, but you aren't writing them off until you close on a property in the area in which you've travelled to.
@William Morrison depends on your purpose of travel, but setting up an entity and then traveling to a state in which you do not yet own property will not grant you a deduction for your travel expenses.
@Brandon Hall, good point, a business has to have income as well in order to be considered a business, can't just have expenses. but in his case he is an investor with other properties and he is looking to expand his business. if you buy a book about rental properties, and you already have a business, its deductible. if his LLC, documents in their minutes that they want to explore expanding the business, i do not see the reason why he could not, he is not just starting a business.
@Brandon Hall I think in the way your considering it, it is not the state but the trip or trips that need to be looked at. Example if I came into our area and looked at Fairfax, Silver Spring and Arlington, I would not have to separate them by state. There are so many cities like DC that are wrapped by other states, like the area in South Carolina south of Charlotte, NC. Thus the Silver Spring portion can be used against a Fairfax purchase if that's where the final decision landed.
That's with no entity involvement.
An entity setup to provide evaluation services to investors can do research via travel, bill and pay
pay employees. It does not have to wait for a purchase by those billed to expense. Those billed can be entities with all or some common partners. And yes it wont work if investment properties are not being purchased. The evaluation entity has to be viable and have income. A property would not have to be purchased after every trip. The purchasing entity may have to capitalize, but multi trips could be involved.
Now it could be thought that this thread is about a first property purchased in a persons name which is different than I've described.
@Patrick Liska expansion and investigative costs are either added to the property basis or are amortized as start up costs. You must have a property in a geographical region to be considered in business in that geographical region. At that point all expansion and travel costs incurred within the same geographical region are fully deductible as you are already considered to be in business in that geographical region.
If you deduct these expenses and lose on audit, you lose the ability to deduct them at all as the IRS will not permit you to retroactively apply the costs to the basis or amortize them.
Again, and the rule makes sense. Without it, people would deduct "business expenses" on all personal travel. And then it's the honest taxpayers footing the bill.
Also, books are educational expenses. A different category with an entirely different set of rules. Apples to oranges.
I thought in the podcast @Amanda Han said, if you have documentation proving you communicated with a real estate agent before the trip and had an itinerary to look at properties before you began the trip, then the trip is deductible. The example was appointments on Friday and Monday, which allowed for travel on Thursday, appointments on Friday, downtime on the weekend, and more appointments on Monday, traveling home on Tuesday.
Is this all wrong?
It doesn't appear that Brandon Hall is saying the expense isn't deductible....its just that it isn't deductible in the sense that most assume.
@Brandon Hall, I appreciate your views. So I hope my comments and questions show that in the tone. <Grin>
I’m not much into turning a vacation into a business trip which may be an underlying part of some of the questions but not in this case.
Now that said, I can easily see a three city trip looking at Turn Key properties in Houston or San Antonio, Memphis and Indianapolis with the parent company in California. This with the expectation of buying one or more properties, but all in only one of those cities.
Aren’t those trips all tied to the eventual purchase even though different states and regions? Take any entity issues out of the discussion. I'm talking an individual buying in their name.
Buying in one of those cities rather than one property in each only adds one out of state tax filing, not three. The eventual PM is national.
@Brandon Hall, thank you for your time and explaining this. i did find this from NuWire investor, an article on travel expenses and it had this exert, which relates to what you have been saying. in there they say, as long as you are going to see a specific property and not acquire it you can deduct it as a loss, which is why Jack would have to plan ahead to look at specific properties, that he just can't go there and decide to look around while there and deduct it. what are your thoughts on that ? besides possibly asking for an audit.
- If you are traveling to explore a specific investment opportunity and you make the investment, your travel expenses are not deductible; they are added to the basis of the investment. However, if you made the trip intending to acquire a specific business or property but were unsuccessful in making the acquisition, your travel expenses are deductible as a loss. No deduction is allowed for travel in a general investigation or search for new business or investment opportunities.
Jack B. I do.
Also side related and some thing that might sound ridiculous. Is it even worth doing there. I mean a flight hotel and T&E will be a couple grand. That's more than half the years Cashflow on that rental. Just know that if you are going there it does not make financial sense and that you are just doing it for the warm and fuzzy feeling. But if that's what you are looking for than I am cool with that.
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Engineer
- The Wealth Elevator
@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.
Originally posted by @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.
Thanks Brandon, When I've traveled to date, I've done enough investigation before going to know I'm most likely buying. And so far I have. And yes it's added to the basis for me.
I have been looking at two places now that are not so close to each other (maybe 6 hour drive) and across state lines with the idea of only buying in one. It more about adding just one more multi state tax requirement as opposed to two. Grin.
@Brandon Hall Hi Brandon. Where is the addition of expenses to the basis in the IRS code? Is it in Pub 597 or elsewhere?
Thank you,
Jason
So If I have rental property in Southern California and I travel to Northern California to look at possible rental properties for purchase (even if I don't purchase) can I deduct my travel costs?
That is, would Northern California be considered to be in an area (state) where I have rental property or is it a new area and so no deduction?
Jeff
Geograpgic area? Is there some type of measurements as a guideline to specify what is consider within the “Geograpgic Area”?
I am just getting started-literally- and going to set-up LLC or SCorp. I have been reading on this site and trying to determine which niches to learn first. The site recommends you post every day so please have patience.
My question: If I have Iand I purchased in GA in 2005 for potential retirement use-is there some means for including this in my business? If I go down and spend two days reviewing the marketplace and educating myself-may I deduct the expenses? So you cannot claim the expenses from year one in other states until you close and have income. What about in your home state? Is this the same? Or if I sell the land I can include that in my business income? The market has been soft and I would like to look at this lot with a business lens vs personal.
Also, all expenses must be deprecated over 27.5 years? Should have started this business 20 years ago:)
Hey quick scenario question.
- Previous owned no rentals.
- In Jan 5 I got an accepted offer on a MN duplex(I live in DC)
- Visited on Jan 15th and closed on Feb 15th, then listed rental on Feb 27th
- Would my Jan 15th trip be a standard travel write-off even though I didn't yet own it