Travel Expenses: Deducting Real Estate Purchase Trips

Travel expenses related to purchasing real estate can be tax-deductible, but there are several factors that determine whether or not they qualify as deductible expenses. Firstly, the trip must be primarily for business purposes, with the majority of the time spent on rental business rather than leisure. Secondly, the expenses must be ordinary and necessary, meaning they are common, helpful, and appropriate for conducting business. This includes transportation costs, lodging, meals, and other business-related expenses. However, it's important to note that travel expenses for improving the property, such as overseeing construction or making capital improvements, are generally not deductible. Additionally, local travel expenses may be deductible if you have a home office, or if you travel from your workplace to the rental property. Proper documentation and consultation with a tax professional are crucial to ensure compliance with tax laws and to maximize your deductions.

Travel expenses to a new rental market

However, if you travel to a new city and purchase a rental property, these travel expenses are not immediately deductible. They must be capitalised by adding them to your property basis and depreciated over 27.5 years.

If you already own a property in the market, travel expenses can be fully deducted, assuming they are ordinary and necessary for your rental property business in the market.

Travel expenses to a property you already own

If you already own a property, you can deduct travel expenses incurred when travelling to visit it. However, there are some important rules to follow to ensure that your travel expenses are deductible.

Firstly, your travel expenses must be "ordinary and necessary" for your real estate business. This means that the trip and the expenses incurred must be helpful and appropriate for your rental activity, although not necessarily indispensable. For example, travelling to a rental property is not always considered an "ordinary and necessary" expense. Additionally, you must not overdo your expenses; for instance, staying in a 5-star resort when travelling out of town for your rental business is not considered an "ordinary and necessary" expense.

Secondly, the primary purpose of your trip must be for business, and it must have a clear business purpose. The majority of your travel time must be spent on your rental business rather than leisure. Rental activities that are considered deductible include showing the property to prospective tenants, conducting inspections, repairs and maintenance, and meeting with members of your local real estate team, such as an accountant, attorney, or property manager. On the other hand, travelling to make capital improvements to the property, such as replacing the HVAC or installing a new roof, is not considered a deductible expense.

Thirdly, your travel expenses and the reason for your trip must have a logical connection to your rental property business. If audited, the IRS is likely to question any trip that doesn't have some logical connection to your rental activity.

It's important to note that if you are not yet in business, and are travelling to inspect potential future rental properties, your travel expenses are generally not deductible. However, these expenses can be considered start-up costs and may be deductible once you enter into business and buy your first rental property.

When it comes to specific travel expenses, you can deduct airfare, train or bus fare, car rental expenses, parking fees, tolls, shipping costs for luggage or supplies, lodging expenses, 50% of meal and beverage expenses, tips, and miscellaneous expenses such as laundry, dry cleaning, groceries, computer rental fees, and internet charges.

Additionally, if you are driving your own car for your rental business, you can deduct your costs using the standard mileage rate or your actual expenses. The standard mileage rate issued by the IRS for 2021 was 56 cents per mile for a car, van, pickup, or panel truck.

Local travel tax deductions

When it comes to local travel tax deductions for purchasing real estate, there are a few key things to keep in mind. Firstly, the IRS considers your "tax home" to be your regular place of business, regardless of where you maintain your family home. This includes the entire city or general area where your business or work is located. If you have multiple regular places of business, you can determine your tax home by considering the total time spent in each place, the level of business activity, and the significance of income from each place.

Now, let's discuss the deductions. If you're travelling within your tax home, you can't deduct travel expenses. However, you can deduct transportation costs. For example, daily transportation costs to and from your primary job (W-2 job) are not deductible as they are subject to the commuter rule. But if you drive from your primary job to your rental property or job site, that mileage is deductible as it's considered office-to-office travel. If you have a home office and your residence is your principal place of business, you can deduct daily transportation expenses for travelling between your residence and another work location within the same trade or business.

When it comes to local travel deductions, there are two main methods: the actual expense method and the standard mileage deduction. The standard mileage deduction is simpler, where you multiply the number of miles driven for business by the standard mileage rate set by the IRS. For example, if you drove 500 miles in a month for rental property-related purposes, and the standard mileage rate is 56 cents per mile, your deduction would be $280. The actual expense method, on the other hand, allows you to deduct a portion of your actual vehicle expenses, such as interest on car loans, repairs, maintenance, tolls, and parking fees.

It's important to keep accurate records of your mileage and expenses, as the IRS requires a compliant mileage log. This should include the odometer readings at the beginning and end of the period, the date, purpose, number of miles, and locations of each trip. Additionally, keep in mind that local travel deductions only apply if your trip is primarily for business purposes. If you mix business and personal travel, ensure that you spend more than half of the total number of days on business activities.

Travel expenses to see people who can help you operate your rental activity

However, it is important to note that the IRS closely scrutinises these deductions, and taxpayers are often caught claiming these deductions without proper records to back them up. Therefore, it is important to keep detailed records of your travel expenses and ensure that they meet the criteria for deductibility.

The IRS states that you can deduct the "ordinary and necessary expenses of travelling away from home if the primary purpose of the trip is to... manage, conserve, or maintain your rental property". The trip must be primarily for your rental activity, and you must have a rental purpose in mind before starting out.

In addition, your travel expenses must be "ordinary and necessary". This means that the trip and expenses must be helpful and appropriate for your rental activity, but not necessarily indispensable.

If you are a cash basis taxpayer, you generally deduct your rental expenses in the year you pay them. If you use an accrual method, you deduct your expenses when you incur them, rather than when you pay them. Most individuals use the cash method of accounting.

It is also worth noting that travel expenses are deductible as long as you are travelling outside of your "tax home". Your tax home is your regular place of business, and it includes the entire city or general area in which your business or work is located.

Travel expenses to conduct repairs and maintenance

Travel expenses related to purchasing real estate are generally not deductible. However, if you are a real estate professional, these expenses may be deductible.

Now, let's focus on travel expenses related to repairs and maintenance.

According to the IRS, you can deduct the ordinary and necessary expenses of travelling away from home if the primary purpose of the trip is to manage, conserve, or maintain your rental property. This includes travelling to conduct repairs and maintenance on your property. However, it is important to note that travel expenses for improvements, such as replacing the HVAC or installing a new roof, are not deductible.

• Travelling to a local hardware store to purchase supplies for repairs on your rental property is considered a deductible travel expense.
• Driving to your rental property to meet a contractor and oversee repair work is also a deductible travel expense.
• If you need to travel out of town to conduct repairs or maintenance on your rental property, you can deduct travel expenses such as airfare, train, or bus fare, as well as lodging expenses and 50% of meal costs.
• If you are conducting repairs or maintenance on multiple properties during a single trip, you can deduct travel expenses for each property as long as the primary purpose of the trip is business-related.

It is important to keep good records of your travel expenses and ensure that the majority of your travel time is spent on business activities rather than leisure. Additionally, travel expenses must be "ordinary and necessary," so luxury expenses are not deductible.

By following these guidelines, you can effectively deduct travel expenses related to conducting repairs and maintenance on your rental properties.

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