Tax Expense Deduction

[Brenda Lee]

We just recently purchased a rental property in Utah from out of state.  Prior to renting out the home we will have to fly out there to prep the home for rent.  Just wondering if we can count expenses incurred for flying out, purchasing washer/dryer, keeping the water/electricity on, and other maintenance items on our tax returns to lower our taxable income?

[Michael Plaks]

@Brenda Lee

Your question has more layers than it may seem at first. 

1. The starting point, as @Basit Siddiqipointed out, is whether the property has been "placed in service" before your trip. This is often not straightforward, but if the property is in bad shape and needs major repairs before it can be offered for rent, then all deductible expenses of your trip will be treated as an extra cost of buying the property. You cannot deduct such expenses. You have to slowly deduct small portions of these expenses over many years, which is called depreciation of capitalized acquisition costs, if you like big words.

2. The next question is whether this trip's costs are business expenses or personal expenses, as @Ashish Acharya elaborated. To be business expenses, the trip needs to be "primarily for business." 

3. And even if the primary purpose was to take care of the property, as opposed to, say, enjoying a vacation or visiting family, you still need to pass the "ordinary and necessary" test. The test is designed to eliminate expenses that, in layman's terms, do not make business sense. For example, depending in your property's condition and all the circumstances surrounding your purchase, it may not be cost-effective to fly across the country to deal with it. A more common approach is to hire a local property management company. And you don't need to fly there to buy appliances. But it is case-by-case. 

4. Buying appliances. This will be deductible once the property is "placed in service," regardless of your trip's tax treatment.

5. Lowering your taxable income. Even if you do have all these deductible expenses, they do not necessarily reduce your taxable income. They can offset the rent income from this property down to zero, but they may not be able to offset your other income, such as your W2 salaries from jobs. It has to do with the complex rules known as "passive activity losses" and depends on your overall income.

As you can see, this is not that simple.