Buisness Trip Write Off Technical Questions

[Nicholas Alves]

Hey guys! Two part question here. Is traveling to a different state to look at rental property considered a business trip? I will be going to Hawaii to look at some rental property. However, I do not have my LLC formed yet. Will I be able to write off this expense as a business trip and can you even make tax write offs on business expenses that were made prior to the LLC formation?

[Ashish Acharya]

1) having LLC does make the trip deductible.

2) traveling to look for property is not deductible. This also depends on other business activities you have. 

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 costs for most individuals are considered personal in nature (unless you have an RE portfolio that is run like a business- see below). If you had identified the property, the cost, and 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 an ordinary travel cost. This is a schedule C activity if you don't have an entity. Flipping is more than likely will be considered trade or business.

2) Rentals: For this purpose, rentals are not considered trade or business, so initial inventory costs 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 costs are added to the basis as mentioned above). The reason you can't deduct travel expenses before identifying property is you report 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 don't 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.

As I said, it gets complicated really quickly. Please talk to your CPA.