Travel Expenses: Out-Of-State Property Deduction Eligibility

Owning rental properties comes with a lot of benefits, including tax deductions. But what about travel expenses to out-of-state properties? The answer is yes, you can deduct these costs, but there are some important conditions to meet. Firstly, the trip must be primarily for your rental activity, and you must have a rental purpose in mind. This could include overseeing maintenance, dealing with tenants, buying supplies, or meeting with professionals. Travel expenses must also be ordinary and necessary, so no lavish expenses or first-class airfare! Keep in mind that if you add vacation days to your business trip, your work days must outnumber your personal days. Now, let's dive into the specific rules and requirements for deducting out-of-state travel expenses.

Travel expenses for landlords

As a landlord, you can deduct travel expenses when visiting a remote real estate investment in another market or a property you own locally. However, the IRS considers travel expenses one of the most abused deductions for business people, so it's important to follow the rules.

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 collect rental income or to manage, conserve, or maintain your rental property. The cost of improvements is recovered by taking depreciation.

• The purpose of travel must be mainly for business and have a clear business purpose.
• The majority of the travel time must be spent on your rental business rather than leisure.
• Travel expenses must be "ordinary and necessary" for your real estate business, but not excessive. For example, staying in a 5-star resort when an Airbnb or VRBO is available.
• Rental activities, such as showing the property to prospective tenants or conducting an inspection, are deductible travel expenses if that was the main reason for travelling.
• Travelling to conduct repairs and maintenance is deductible, but travelling to make a capital improvement, such as replacing the HVAC or installing a new roof, is not.
• Expenses travelling to and from the airport, such as a taxi or Uber.
• Airfare, train, or bus fare.
• Car rental expenses and associated costs such as parking fees or tolls.
• Travel to a hardware store to shop for materials and supplies to be used for your rental property.
• Travelling to the property to show it to prospective tenants.
• Travel expenses incurred to interview or meet with members of your local real estate team, such as an accountant, attorney, leasing agent, property manager, lender, or general contractor.
• Costs of travelling to an event or meeting for continuing education purposes, such as a seminar, trade show, or convention.
• Shipping costs for luggage or items required for your rental property business.
• Lodging expenses and 50% of meal and beverage expenses incurred while travelling outside of your home market.
• Tips paid for services in conjunction with travel to your rental property.
• Miscellaneous expenses such as laundry and dry cleaning, groceries, computer rental fees, or internet charges.

There are two ways to deduct travel expenses: using the actual expenses or the standard mileage rate. The latest details about the IRS's requirements and the current mileage allowance can be found in IRS Publication 463.

It's important to keep track of all your rental property travel expenses to reduce your taxable income and save money. You can use a spreadsheet or special software to track these expenses.

When deducting travel expenses, keep track of all your receipts and expenses to stay organized and ensure you can deduct all eligible expenses.

Deductible travel costs

To deduct travel costs, certain conditions must be met. The Internal Revenue Service (IRS) has two criteria for determining whether someone is travelling for work:

• Your responsibilities require you to be away from the general area of your tax home for a period longer than an ordinary day's work.
• You must sleep or rest while away from home to meet the demands of your work.

Your tax home is the location where you regularly run your business, including the general area and the entire city where your business is located. If you run your business from your personal residence, then that is your tax home.

If you are travelling for work, you can deduct the following travel costs:

• Transportation, including airfare, bus tickets, or mileage on your personal vehicle.
• Taxis, commuter buses, or rideshares to and from the airport or terminal and your hotel, plus the cost for rides from your hotel to the rental property.
• Baggage and shipping costs.
• Lodging and non-entertainment meals.
• Fees for dry cleaning and laundry during your trip.
• Communication expenses, such as telephone or fax charges related to your business during your trip.
• Other necessary trip-related expenses, like travel to and from a business meal, notary fees, or long-term housing costs.
• Tips paid in association with any of the above expenses.

If you use your personal vehicle for business travel, you can expense your mileage. The mileage reimbursement rate is based on the fixed and variable costs of operating a vehicle. When deducting your mileage as a business expense, do not also expense your costs for fuel or maintenance.

If your trip is primarily for improving your rental property, your travel costs are not deductible. The costs of improvements, including your travel expenditures, are recovered through depreciation.

If you add vacation days onto a business trip, your work days during the trip must outnumber your personal days. If you spend over 50% of your trip time on rental activities, then your transportation costs, lodging, and meals are deductible. On personal days, those costs are non-deductible.

If your personal days make up over 50% of your trip, the IRS considers the trip a vacation. If you work while on vacation, you can only deduct costs directly related to your business activities, such as conference fees, taxi fares to and from appointments, and notary fees.

If you travel with your spouse, partner, or dependents, their travel costs are not deductible unless they travelled with you for a legitimate business reason.

Travel for repairs and maintenance

When it comes to travel for repairs and maintenance, there are a few things to keep in mind. Firstly, the Internal Revenue Service (IRS) has specific criteria for what constitutes "travel". Your responsibilities must require you to be away from the general area of your "tax home" for a significantly longer period than an ordinary day's work. To meet the demands of your work, you may need to sleep or rest while away from home. Your "tax home" is typically the location where you regularly run your business, including the entire city or general area where your business is located. If you run your business from your personal residence, then that is your "tax home".

For rental property owners, this often means travelling out of your general area and staying overnight. Simply napping in your car does not meet the IRS rest requirements. It is important to note that your travel must be primarily for business purposes. Common reasons for rental property owners to travel include overseeing maintenance, repairs, or improvements to the property, dealing with tenants, and buying supplies.

If you travel away from home for repairs and maintenance on your rental property, you may incur various deductible costs. These include transportation expenses, such as airfare, bus tickets, mileage on your personal vehicle, and taxi or rideshare costs. Additionally, you can deduct lodging expenses, non-entertainment meals, dry cleaning and laundry fees, and communication expenses related to your business during your trip. Remember that not all expenses are 100% deductible. For example, as of 2023, travel-related meals are only 50% deductible.

When deducting travel expenses, it is crucial to maintain proper records and documentation. The IRS may require an account book, diary, log, expense statement, or trip sheet to support your deductions. Documentary evidence, such as receipts, cancelled checks, or invoices, should include the vendor's name and location, the nature of the expense, dates, and a breakdown of charges.

It is important to note that if your trip is primarily for improving your rental property, your travel costs may not be deductible. Improvement costs, including travel expenditures, are typically recovered through depreciation. Additionally, if you are travelling to a new market to research potential properties, these travel costs are considered start-up expenditures and are only deductible after you have purchased a rental property in that market.

Auto expense deductions

If you are using your car for business purposes, you may be able to deduct car expenses. You can generally use one of the two following methods to figure out your deductible expenses:

Standard Mileage Rate

The standard mileage rate for the cost of operating your car for business use is 65.5 cents per mile. You can generally use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate.

Actual Car Expenses

If you use actual expenses to figure out your deduction for a car you own, there are rules that affect the amount of your lease payments you can deduct. Here are some of the expenses you can deduct:

• Depreciation
• Licenses
• Business and personal use
• Interest on car loans
• Personal property taxes
• Parking fees and tolls
• Sale, trade-in, or other disposition
• Fuel
• Repairs and maintenance
• Tires
• Insurance
• Registration fees
• Garage rent
• Operating and maintaining a house trailer

Travel to a new rental market

If you're considering investing in a new rental market, you may be wondering about the tax implications of travelling to a different city or state to view potential properties. Here's what you need to know about deducting travel expenses when exploring a new rental market:

Understanding Travel Deductions for Rental Property Owners:

Firstly, it's important to understand the criteria for what constitutes "travel" according to the Internal Revenue Service (IRS). There are two main conditions that must be met:

• Your work responsibilities require you to be away from your regular place of business, or "tax home," significantly longer than a typical workday.
• You need to sleep or rest outside your tax home to meet the demands of your work.

Your tax home is typically the location where you run your rental property business, which may be your personal residence if you manage your properties from home. Therefore, when travelling out of town for your rental business, you must stay overnight or for a duration that necessitates sleep or rest.

Travel Expenses for a New Rental Market:

Now, let's discuss the specific scenario of travelling to a new rental market:

• Purchasing a Property in a New Market: If you travel to a different city or state, incur travel expenses, and ultimately purchase a rental property in that new market, your travel costs are not immediately deductible. Instead, these expenses are capitalized and added to the basis of your new property. You will recover these costs through depreciation over 27.5 years.
• Owning Multiple Properties in the New Market: Once you establish your rental business in the new market by purchasing your first property, any subsequent travel expenses between your tax home and the new market will be deductible. This is because your business is now considered established in that location.
• Not Purchasing a Property in the New Market: If you travel to a potential new market and decide not to buy a property, the IRS classifies these travel costs as start-up expenditures. These expenses are only deductible after you acquire your first rental unit in that market.

Deductible Travel Expenses:

When it comes to deductible travel expenses, the IRS allows you to deduct ordinary and necessary expenses incurred while travelling away from home for your business. Here are some examples of deductible travel expenses:

• Transportation costs, including airfare, bus tickets, or mileage on your personal vehicle.
• Taxi or rideshare fares to and from the airport or terminal to your hotel, as well as transportation from your hotel to the rental property.
• Baggage and shipping costs.
• Lodging and non-entertainment meals (50% deductible).
• Dry cleaning and laundry expenses during your trip.
• Communication expenses, such as phone or fax charges related to your business.
• Tips paid in association with any of the above expenses.

Important Considerations:

It's important to remember that not all expenses are 100% deductible. For example, while certain meal costs were fully deductible in previous years, as of 2023, travel-related meals are only 50% deductible. Additionally, if your trip includes personal days that make up over 50% of your total trip time, the IRS considers it a vacation, and you can only deduct costs directly related to your business activities.

When it comes to travel expenses for a new rental market, it's crucial to consult with a qualified tax professional or accountant to ensure you're adhering to IRS guidelines and maximizing your deductions appropriately.

Frequently asked questions