As real estate investors, we are always on the move—viewing and managing properties, investor, broker, banking, and vendor meetings, research new markets, and even education. And the list goes on! It’s no surprise then that many of these costs are tax deductions, but there are some nuances all real estate investors MUST familiarize themselves with in order to be as tax efficient as possible.
Simply put, for business travel it 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. While most of your activities are ordinary and necessary, it is important to understand the various rules for deducting travel expenses.
Local travel for real estate investors
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 (i.e. city or locality) where you have an established rental business.
There are generally two ways you can deduct these trips: 1) using the actual expense method, or 2) the standard mileage deduction. Both methods require you to keep an IRS-compliant mileage log.
An IRS-compliant mileage log 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.
To log mileage in Stessa, navigate to your Transactions page and create a new expense item by clicking the “+ Add” button. Then click over to the “Mileage” tab and input the date and number of miles driven. Stessa will automatically calculate the correct expense amount in dollars based on the IRS reimbursement rate for the year in which the miles were driven. Finally, click “Save” to see your new mileage transaction appear in your tenant ledger. All mileage is then reported on your Income Statement under the Admin & Other category.
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 amount of miles you drove for business and multiply it by the standard mileage rate to get your deduction. The standard deduction for 2018 is 54.5 cents per mile and 58 cents per mile for 2019.
You drove a total of 10,000 miles in 2018. 6,700 were business miles. Your mileage deduction for 2018 is $3,651.50 ($0.545 x $6,700).
The only 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.
Also important to note, in order 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||Interest on Car Loans|
|Gas and Oil||Repairs and Maintenance|
|Tolls and Parking Fees||Other Fees (e.g. 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 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 (e.g. receipts) of all these expenses throughout the year. Stessa’s mobile app can help with this as it includes OCR and machine learning to capture and automatically categorize receipts for free.
You drive a total of 10,000 miles in 2018. 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 2018 ($8,000 x 67%).
Travel to new markets
Travel expenses are treated a bit 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.
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 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 (i.e. taxi, bus, etc.)
- From the lodging area (i.e. hotel, Airbnb, etc.) to the business location (i.e. potential rental property, conference center, etc.)
- Rental cars
Lodging expenses (i.e. hotel, Airbnb, etc) on overnight stays that are required for sleep or rest are deductible.
- 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 and business travel
When you mix business travel with personal travel, some of the expenses (i.e. 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.
It’s important to note, however, that 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 (i.e. airfare) are 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 tax deductible. However, the lodging, meals, and other expenses from the two personal days are not deductible.
Travel is a regular part of doing business, particularly for real estate investors. You need to understand the distinction of “ordinary” and “necessary” to know what you can and cannot deduct. The last thing you want is the tax man after you for shady accounting practices. It’s not worth it! Understand the local travel deductions, as well as the process of mixing business and personal travel, and you’ll be well on your way to running staying onside of the tax incentives that are there for real estate investors to leverage to expand their businesses and keep more business income in their accounts.