As a rental property owner, you need to be familiar with the deductions related to your investment that the IRS allows you to claim. Most expenses are straightforward and have a transaction record, like a repair or property management fees. These are relatively easy to track and deduct, especially with a separate bank account for your rentals and some good accounting software. However, not all expenses are quite so clear-cut. Some, like driving for your rental activities, require additional record-keeping and are only deductible in certain circumstances.
In this article we will explore when you can and cannot claim mileage, the best method to determine the expense amount, and what exactly the IRS requires to take a deduction.
When is mileage a deductible expense for my rental property?
Let’s hear what the IRS has to say on the matter, and then break it down:
Local transportation expenses. You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. (From Publication 527 (2023), Residential Rental Property)
The IRS allows you to claim travel expenses for business tasks that are ordinary and necessary- meaning- legitimate, common tasks that actually help your business. Collecting rent and maintaining your rentals are examples of ordinary and necessary tasks that would allow you to claim a mileage deduction.
So if you drive to the bank to deposit a check after picking it up from a renter, or to the home improvement store and back from your rental, you can claim those miles.
But what about the miles between your home and the rental before picking up that check? The second half of the IRS guidance above says that travel between your home and your rentals is a nondeductible commuting cost. The IRS doesn’t let you deduct your commute to your 9-5 job, and applies the same logic here. But does that really also apply to rental property investors?
Well, as seen above- you CAN deduct those miles if “you use your home as your principal place of business.” The IRS defines the principal place of business in a few ways, including ‘where the books are kept.’ For the vast majority of real estate investors, that means your home is your principal place of business. If you do your books at home, then it qualifies, and you can deduct mileage starting from the time you leave your home.
What method should I use to determine my travel expenses?
The IRS allows you to choose one of two methods for determining your driving expenses: the standard mileage rate and actual expenses.
The easiest and recommended method is to use the IRS standard mileage rate. For 2021, that rate is 56 cents per mile (down from 57.5 cents in 2020). So to calculate the amount of your driving expense, simply take the number of deductible miles you have driven and multiply by 0.56.
When using the standard mileage method, additional expenses can also be deducted for tolls, parking, and prorated property tax and loan interest
The other option is the actual expenses method. You take the total amount spent on the vehicle, and multiply it by the percentage of total miles that were driven for rental purposes as opposed to personal use. If you drove 12,000 miles in a year, and 1200 of those miles were for your rental business, then you can deduct 10% of your actual expenses from that year.
To use this method, you need to track and keep records for every single expense associated with operating and maintaining your vehicle- like gas, insurance, oil changes, and maintenance. This also includes lease payments if you don’t own the vehicle, or depreciation if you do.
If you are great at keeping organized records and take infrequent personal trips in your vehicle, the actual expense method may yield a larger tax deduction than the standard mileage rate. For most investors though, tracking actual expenses is not worth the time and may actually result in a smaller deduction. If you are in doubt, the standard mileage rate is the way to go.
What records do I need in a mileage log for my rental properties?
The IRS requires you to record your miles driven in a particular fashion. They want more than “18 miles on March 1st.” In addition to odometer readings at the beginning and end of the year, the IRS prefers per trip records to include the date, miles driven, the vehicle used, and the purpose of the trip and/or destination(s).
As with most operational records, it’s far easier to keep up with your record-keeping than to catch up. Using accounting software with a built in mileage tracker, or a standalone system, is a great way to stay on top of it.
Please note that if you choose to use the ‘actual expenses’ method, you will also need to keep records for all of your vehicle related expenses in the calendar year, in addition to the per trip records.
How is mileage reported on your tax forms?
For most real estate investors and rental property owners, the IRS Schedule E (link) is the standard form where rental income and expenses are reported. Mileage and other travel related expenses can be reported under the ‘Auto and Travel’ expense category.
This is one area where your Schedule E will not mirror your Profit and Loss statement. Mileage (if taken at the standard rate) and depreciation expenses are not typically a part of traditional Net Income or Cash Flow reports, as they are not directly incurred expenses.
Additionally, if you want to claim local travel expenses, either with the actual expenses method or standard rate method, there is one additional step. The IRS requires Form 4562, which lays out details of the vehicle being used, to be filed alongside your regular return. Only Part V, Sections A and B, need to be completed.
What about other travel related expenses?
In this article, we focused exclusively on mileage and local travel expenses. But what about when you travel out of your local area to manage, maintain, or shop for new rental properties? The IRS has a whole section of rules governing those expenses as well.
The short answer: if your trip is primarily for your rental business, ordinary expenses generally will be deductible. However, if your trip is not entirely for business, you must prorate out your business vs personal expenses. Trips to improve your property are not deductible, as those costs are recovered with depreciation. Meals are usually deductible at 50%.
Conclusion
You can claim mileage deductions for most of the local travel you do in the normal course of operating your rental property business.
So, if you’re on the road for your rentals- you should be claiming your mileage! Using the standard mileage rate makes taking this deduction much simpler. However, the IRS keeps a closer eye on deductions with the potential for abuse, like mileage, so make sure you maintain your records in their preferred format.
