Are Property Search Expenses Deductible
I usually invest out of my local area. (Out of State) If I travel to an area to look for property and I eventually end up not buying it can I deduct the travel expenses,food etc. ?
Would this be a more risky dedcution if I did/could. I like to stay more conservative but I would like to deduct the Airplane ticket costs if possible.
I have not formed a corp/LLC or anything as of yet.
Offhand, I would say no. Rental property is a passive income activity. You can deduct travel expenses to visit your property on the Schedule E.
Perhaps you can even deduct the travel costs of looking for a property IF the trip resulted in the purchase of another rental property.
In my opinion, all the other "expenses" you list are typically associated with an active business. If you file a Schedule C, and these expenses had a legitimate business purpose, then I would say deduct them. It is hard for me to find a legitimate purpose for deducting the cost of a "business trip" lunch that is not directly related to the rental property you are reporting on Schedule E.
Just my opinion, but I am ultra-conservative on this issue.
Well I find this to be an interesting subject... if I work on a deal that falls through I can deduct the Appraisal and Home Inspection Fee for the Dead deal...
But the travel to inspect the property I cant ?
I suggest you consult a good CPA. They will typically tell you all business related expenses are deductible as long as you can prove you conducted some type of business.
Greetings minara!
This is really a question for your CPA to answer. As DaveT indicated, how you’re reporting and how you’re structured can make a big difference.
I have a full C-Corp. and a "sideline" business. Between the two, I can take care most expenses. BUT you have to be careful, because things are tightening up tremendously regarding write-offs. Again, seek the advice of a tax expert. It's well worth it.
Minara,
Use the common sense. if you are the business, all DOCUMENTED expenses are deductible. But keep in mind, the accent is on documented. keep the receipts, noes of the meetings, business cards of the people you meet, agents, circle phone records related to this event and include a copy in a neat stuck leaving the IRS convinced that you know what you do in case you ever get audited.
Alex
a palm pilot or Ipaq like I now use is good for this purpose. I write off all trips as a business deduction or training. I keep a record of my agenda and who I talked to etc. on my Ipaq and even journal some notes.
IT is simple to set up an entity and I do not find the IRS tightneing up much, in fact some things are looser than ever like office deductions.
Good Luck!
Again, I agree with everyone's comments. If you are engaged in an active business, deduct all reasonable business expenses.
Rental property is not an active business, instead it is a passive income activity. Expenses not related to a property reported on Schedule E, if you are not engaged in an active business (Schedule C activity) are personal expenses.
This is just my opinion, and all the other repsonses you have received are just someone's opinion. Our opinions, well-intentioned as they may be, are not tax or legal advice. None of us can be held liable if the opinion presented is incorrect.
This topic is a discussion you need to have with your CPA. Your CPA, acting in his professional capacity, can be held liable if his advice is incorrect and damages you somehow.
Thanks to all for your comments... I have kept good records....Although the notes are not as studious as I would have liked... they are adequate... There is an old saying hogs get fat and pigs get slaughtered.... So Ill keep that in mind in regards to claiming my deductions....
Thanks to all
There you go, Stockpro99 got the good use of hand held technology... and we also got several strong points in favor of business entity vs. keepingthem on personal name. Deductions count. Keep it rganized! [ Edited by omega1 on Date 02/05/2004 ]
David:
Even though rentals get reported on Schedule E, landlording is often considered an active trade or business in the case law. So if the deductions are denied, it wouldn't be due to an "investment activity" issue. More relevant is the "reasonbleness" of the trip and its "primary purpose". To deduct trip expenses, the primary purpose has to be business....meaning you must spend most of the time on the trip actively looking at property (as opposed to laying out on the beach). Also, if you never buy a house on any of the trips, your argument that you were well and truly looking would not be taken seriously. Just my thoughts.
Nice to see. If I stick around here, I'll look forward to chatting with you. Your tax knowledge has always impressed me.
John Hyre, Tax Attorney, Accountant, Investor
In my previous post, I stated that the IRS is tightening up, while other haven’t found that to be the case. My comment was based more on what CAN happen in an audit vs. what they say is allowable.
I had the IRS come in claiming an additional $54,000 due in taxes. The year they were challenging was totally legit, and the records couldn’t have been better documented, accurate or organized. Their red flag was simply a very profitable year. I’ll spare the details, but it went on for 9 months and was finally settled at $4,700 to make them go away.
A lot of people here are structuring as an LLC or Corporation. But are they issuing proper 1099s to contract labor? 1099s to their lawyers or law firms? Do they realize that "business" meals are NOT fully deductible? Etc. etc.
As more replies here state, find a good CPA and tax attorney – not just an accountant. There’s a HUGE difference. And that difference can save you a lot of money and frustration down the road.
"Rental property is not an active business, instead it is a passive income activity."
I spoke with a CPA recently, and the way he explained it to me, it's a passive activity if you are paying for a management company. If you are doing the management yourself, it's an active activity for _that_ property, though it may not be for other properties.
DaveT, can you clarify this a bit more?
Anything and everything considered reasonable in the making of a profit (also called a business), no matter what entity is doing it sole-proprietor/LLC/Inc. receives the benefit of deducting anything that worked towards making a profit, even if a profit was never made, the deal was never made or the deal was made and there was no profit, there was a loss.
If your conducting a business and you have "reasonable" expenses they can be deducted. Don't take my word on it ask any CPA, even the ones that just passed the certification, and the will tell you the same thing.
Quote:"Rental property is not an active business, instead it is a passive income activity."
I spoke with a CPA recently, and the way he explained it to me, it's a passive activity if you are paying for a management company. If you are doing the management yourself, it's an active activity for _that_ property, though it may not be for other properties.
DaveT, can you clarify this a bit more?
mwinburn,
I believe your CPA is mistaken. Perhaps s/he is confusing an active activity with active participation in a passive activity.
The IRS, by default, generally considers rental property operation a passive activity, regardless of your level of active participation in the property management.
Unlike an active business, your income from rental property you own and operate is passive income and is not subject to self-employment taxes.
As an extra benefit that accrues to rental property owners, the tax codes allow you to use up to $25K in net passive losses to offset your other ordinary (active) income. BUT, to do this, you must have actively participated in the activity. Active participation is defined as significant participation in making management decisions for the rentals. Approving new tenants, deciding on rental terms, or, even arranging for others to provide services (such as professional property management) is sufficient to demonstrate active participation in the rental management.
Hope this clears up the question.
<<I have a full C-Corp. and a "sideline" business. Between the two, I can take care most expenses.>>
mcole, what do you mean by a "sideline" business? It's not related to RE?
And why a C-Corp instead of a "S" or LLC? Most people here recommend the later 2. I have talked to CPA's and most recommend the "S" Corp, altho I like the "C" corp for reasons I can't explain. This may have warranted a whole new topic post.
Let's say you own some rental properties and spend some money on things that cannot be attributed to a particular property that you own?
, mail some flyers, etc.
For example, similar to a question above, you incur some costs in the search for a new property but don't buy one. Maybe you take out some classified ads ("we buy houses"
Let's also say you bought some file folders to keep your records in. Where on schedule E (or sched 8825 for partnerships) might these costs be accounted for?
It was recommended to me that one could divide the amounts by the number of properties you own and allocate it equally across the properties on the appropriate line (i.e. sched E: line 5 advertising and line 15 supplies). But I wanted to get others' opinions.