When you have real estate investments, sometimes you have to travel out of town for your business. Maybe you want to go to an out-of-state conference on rental properties. Or you own a rental unit in a different city, and you need to work on the unit. Do you know what the Internal Revenue Service (IRS) considers travel? Are the related expenditures all deductible? What if you go to a new market to research potential properties? We’ll answer those questions today and give you some tips to help you make the most of your business travel costs.
What Counts as Travel?
According to the IRS, there are two criteria for determining whether you are traveling. Both criteria must be met to qualify as traveling.
- Your responsibilities require you to be away from the general area of your tax home significantly longer than an ordinary day’s work.
- To meet the demands of your work, you must sleep or rest while away from home.
Your tax home is the location where you regularly run your business. It includes the general area and the entire city where your business is located. If you run your rental property business from your personal residence, then that is your tax home.
For rental property owners, this means that you’re traveling out of your general area and staying overnight. Simply napping in your car doesn’t satisfy the IRS rest requirements. And your business must be the reason you’re traveling. Common reasons for rental property owners to travel include these situations:
- Overseeing maintenance, repairs, or improvements to your rental property
- Dealing with current or prospective tenants
- Buying materials and supplies for your real estate business
- Meeting with professionals, such as real estate brokers, attorneys, or CPAs, who help you with your business
What Travel Costs Are Deductible
Your travel costs are the ordinary and necessary expenses that result from traveling away from home for your business, profession, or job. Remember, ordinary expenses are common or accepted costs in your trade. Necessary expenses are outlays that are helpful and appropriate for your business.
If you travel away from home to buy or work on your rental property, then you may incur these 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 expenses listed above
Ordinary and necessary expenses are deductible for your business, but be careful. Not all expenses are 100 percent deductible. For example, although businesses could deduct 100 percent of certain meal costs during the past few years, that deduction was temporary. As of 2023, travel-related meals are only 50 percent deductible. Deducting the full cost of travel meals is a red flag for the IRS that can lead to an audit.
If you use your personal vehicle for business travel, you can expense your mileage. However, please note that the mileage reimbursement rate (65.5 cents/mile is the 2023 rate) is based on the fixed and variable costs of operating a vehicle. When you deduct your mileage as a business expense, you shouldn’t also expense your costs for fuel or maintenance. This is another area that the IRS examines closely.
Note that 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. For a review of what counts as an improvement versus a repair, see our article on expenses and capital improvements.
What if You Add Vacation Time to a Business Trip?
Adding some vacation days onto a business trip is a common practice. Just remember that your work days during the trip must outnumber your personal days. If you spend over 50 percent of your trip time on rental activities while at your destination, then your transportation costs are deductible. On the days you spend on your rental-related work, your lodging and meals are deductible too. For your personal days, though, those costs are nondeductible.
What if your personal days make up over 50 percent of your trip? In the eyes of the IRS, that trip is now a vacation. If you work while you’re on vacation, you can only deduct the costs directly related to your business activities. Conference fees, taxi fares to and from appointments, notary fees—those are still deductible. But you’ll lose the opportunity to deduct lodging, meals, and transportation.
And if your spouse, partner, or dependents are traveling with you, their travel costs are not deductible unless they went with you for a legitimate business reason.
What about Trip Expenses for a New Rental Market?
Let’s say you want to expand your rental property business outside of your current city. You want to find a property in a different city (or state), and you need to travel to view potential properties.
If you buy a rental property in the new city, your travel costs are not immediately deductible. Instead, you capitalize those costs and include them in the basis of your new property. You’ll recover the expenditures through depreciation.
Once you own the rental property in the new city, any travel (for business!) between your tax home and the new city will be deductible. You don’t have to capitalize or depreciate the costs because your business is already established there.
However, maybe you traveled to the potential new market and didn’t buy a new property. The IRS counts these travel costs as start-up expenditures. They’re only deductible after you’ve bought your first rental unit in that market.
What Documentation Does the IRS Need?
When you deduct travel or transportation expenses, you must be able to support those deductions. The IRS suggests you maintain an account book, diary, log, expense statement, trip sheet, etc. to help prove your deductions. You’ll need both the record and documentary evidence to support each element of your expenses.
Documentary evidence includes your receipts, canceled checks, or invoices associated with your trip. For the IRS to consider your evidence adequate, it must show four elements:
- Amount paid
- Transaction date
- Vendor name and location
- The essential character of the expense
So if you stay at a hotel during your trip, your receipt is adequate proof if it has the name and location of the hotel, the dates you stayed there, and a breakdown of the charges (i.e., lodging, meals, calls). For meals, make sure the receipts show the name and location of the restaurant, the number of people served, the date, and the amount paid.
To use canceled checks as documentary evidence, you’ll also need the related invoice. The check alone doesn’t prove the business purpose of the expenditure.
If you deduct your mileage at the IRS defined rate, you must keep a log. You can use REI Hub’s mileage log, or you can create your own. Just make sure you include these elements:
- Date
- Destination
- Business purpose
- Number of miles per trip
- Vehicle driven
- Property (optional)
Generally, you should keep your records for three years from the date you file your taxes related to the deduction. See our related resource article for a full discussion on what records to keep and how long to store them.
Takeaways
Travel is one of the most misused categories for deductions. In fact, two of the top five errors rental property owners make in their books involve auto costs and meal deductions. Be proactive when working on the books for your investment property. Make sure your supporting documentation is in order to corroborate your deductions. When you go on a trip, spend most of your time on business so you can maximize your deductions. Remember that expenditures related to improvements or investigating a new market aren’t immediately deductible. If you have travel costs and you aren’t sure whether they are deductible, talk with your tax preparer. Make the most of your travel-related costs by putting in a little time and effort to stay organized and have a plan.
