In general, business travel expenses must be considered both “ordinary and necessary” to be tax-deductible. Ordinary means it is common and accepted within the trade or business. Necessary means it is helpful and appropriate for the trade or business.
As a real estate investor, you’ll likely travel to and from your rental properties, other business locations, new markets, and education related events. While most of these activities are indeed ordinary and necessary, you must understand the rules for deducting travel expenses.
Local Business Travel Expenses
Most rental property owners routinely travel to and from rental properties located within driving distance. You might also travel to the bank, the hardware store, or to meet with your broker, your attorney, and so on.
If you established a home office, these miles are considered business miles and are tax deductible within your “tax home.” Your “tax home” is considered the geographic location (that is, the city or locality) where you have an established rental business that functions as your place of business.
There are usually two ways you can deduct these trips:
- using the actual expense method, or
- the standard mileage deduction.
Both methods require you to keep an IRS-compliant mileage log that contains the following:
- odometer at the beginning of the year
- odometer at the end of the year
- for each trip:
- the date of your trip
- the purpose of the trip
- the amount of miles of the trip
- locations of your trip
Remembering to log the trip each time you drive somewhere for business can be a challenge. Use an automatic mileage tracking app like MileIQ in tandem with Stessa’s mileage expense feature to make sure you’re not missing any deductible miles.
Standard Mileage Rate
The standard mileage rate is the simplest way to deduct local travel expenses because it requires the least amount of tracking.
Simply take the number of miles you drove for business and multiply it by the standard mileage rate to get your deduction. The standard mileage rate for 2022 is 58.5 cents per mile for 1/1/22 – 6/30/22 and 62.5 cents per mile from 7/1/22 to 12/31/22. The Internal Revenue Service (IRS) has updated the optional standard mileage rate in 2023 to 65.5 cents per mile for business travel.
You drive a total of 10,000 miles in 2023. 6,700 of those were business miles. Your mileage deduction for 2023 is $4,388.50 ($0.655 x 6700 miles).
The sole actual expenses you can deduct under this method, in addition to the mileage, are parking fees, tolls, interest on a car loan, and personal property tax on the vehicle.
To use the standard mileage rate, you must use it in the first year you use your vehicle for business purposes, otherwise you can only use the actual expense method. However, you can later switch to the actual expense method, and back again, so it’s generally best to start with the standard mileage rate.
Actual Expense Method
Under the actual expense method, you can deduct a portion of your actual expenses from operating your vehicle. These expenses include, but are not limited to:
- lease payments
- gas and oil
- tolls and parking fees
- interest on car loans
- repairs and maintenance
- car washing
- other fees (for example, registration fees)
Note: Tickets and violations are NOT tax deductible.
Your deduction is based on the percentage of actual miles driven that you used your vehicle for rental business. This percentage is determined by dividing the amount of miles you drove for business by the total miles you drove for the year (business miles/total business and personal miles).
You will also need to keep records (receipts) of all these expenses throughout the year. Stessa’s mobile app can help as it includes OCR and machine learning to capture and automatically categorize receipts for free.
You drove a total of 10,000 miles in 2022. 6,700 were business miles. Your business percentage for the vehicle is 67% (6,700/10,000). After tallying up all the expenses related to your vehicle, the total is $8,000 for the year. You can deduct $5,360 for 2022($8,000 x 67%).
Business Travel Expenses for New Markets
Travel expenses are treated differently when traveling to a new market outside of your tax home.
Travel expenses incurred to research and evaluate any new property that you eventually purchase outside of your tax home will be added to the basis of the property and depreciated over 27.5 years. Once you purchase a rental property in the new geographic area, additional new travel to the same area to evaluate other potential acquisitions becomes tax deductible as a business expense.
If your rental activities rise above the level of “investor” (Frank v. Comm’r., 20 T.C. 511) then travel costs to look for properties falls into two categories:
- Expenses incurred to look at properties you purchase, and
- Expenses incurred to look at properties you don’t purchase.
Expenses incurred to look at the property you ultimately acquire will be added to the basis and depreciated over 27.5 years (Rev. Rul. 77-254).
Expenses incurred to look at property within a geographic location in which you already operate as a landlord are fully deductible assuming they are ordinary and necessary for the conduct of your landlord business. Expenses incurred to look at a property in a geographic location in which you do not already operate as a landlord are considered business start-up expenses. This is documented in O’Donnell v. Comm’r., 62 T.C. 781.
As with other expenses, travel must be ordinary and necessary.
Perhaps surprisingly, travel expenses incurred to evaluate property in a new market in which you don’t eventually purchase a property are not immediately deductible. These are considered start-up expenses that can only be deducted after purchasing your first property in the new geographic area.
What Types of Business Travel Expenses are Deductible?
Transportation to and from the business destination is tax deductible. This includes but is not limited to:
- train and bus tickets
- car expenses (see above)
Other transportation costs that are deductible include:
- expenses for travel to and from the airport (taxi, bus, etc.)
- from the lodging area (hotel, Airbnb, etc.) to the business location (potential rental property, conference center, etc.)
- rental cars
Lodging expenses (such as a hotel, Airbnb, etc.) on overnight stays that are required for sleep or rest are deductible.
- business meals outside of your tax home are 50% tax deductible
- dry cleaning
- other ordinary and necessary business travel expenses
Entertainment is no longer tax deductible under The Tax Cuts and Jobs Act.
Mixing Personal & Business Travel
When you mix business travel with personal travel as many small business owners do, some of the expenses (like airfare) may still be tax deductible if the trip was primarily for business purposes.
In general, this means you should be spending more than half of the total number of days you’re traveling on business activities versus personal activities. A day is considered a business day if you spend four or more hours on business activities.
However, lodging expenses, meals, and other expenses incurred during days primarily dedicated to non-business purposes are not tax deductible. In addition, any travel expenses for a spouse (or child) that isn’t traveling for a “bona fide” business purpose is not tax deductible.
Also keep in mind that if the trip is primarily for personal purposes, travel to and from the destination is not tax deductible but business expenses incurred during the same trip are deductible.
You go on a seven-day business trip to visit your out-of-state investment portfolio and spend five days on business and the other two at the beach.
Because this trip was primarily for business purposes, the entire round-trip airfare, plus lodging, meals and related expenses for the five business days are business-related tax deductible. However, lodging, meals, and other expenses from the two personal days are not deductible.
Check out more topics on rental property tax deductions:
- Rental Property Accounting Basics
- 9 Common Landlord Tax Deductions
- Pass-Through Deductions and Casualty Losses
- Rental Property Depreciation Overview
- Capital Improvements vs. Repairs and Maintenance Expenses
- Passive Activity Limits and Passive Losses
- Capital Gains, Depreciation Recapture, and 1031 Exchange Rules
- Short-Term Rentals and Related Taxes
While reasonable efforts were taken to furnish accurate and up-to-date information, we do not warrant that the information contained in and made available through this guide is 100% accurate, complete, and error-free. We assume no liability or responsibility for any errors or omissions in this guide.