Sounds too good to be true, right? I’ve always been a skeptic at heart, but this time it's true! It doesn’t involve dishonesty or shady tactics either. It is 100% legitimate and written in IRS code. So, what’s the catch? Let’s dig in.
There are several ways to reap the benefits of tax deductions for vacations, but today we are focusing on real estate investing. Keep in mind that this strategy is only recommended if you can find a profitable rental property, as tax deductions aren’t worth it if you must lose money to get them. If you are interested in real estate investing as a way to make money, then looking for properties in locations you like to visit or near family can offer an added bonus of deducting your travel expenses when you visit.
So, how does it work? When you own a rental property the IRS allows you to deduct travel costs if you are “collecting rent, managing, conserving or maintaining your property.” This is true even if the property is located far from you, as it is expected that property owners should monitor their properties. One important caveat is that if you are traveling to improve a property you cannot deduct those expenses; they must be capitalized. I’ll cover the difference between repairs and improvements in a future blog post.
Example: Condo in Florida
Here’s an example from my life: my in-laws live in Florida part-time and we usually visit at least once per year. If we bought a condo near my in-laws, then we may be able to write off our travel expenses; it depends on several factors though, so pay attention! The key is to make sure you have documentation showing that the primary purpose of the trip is your rental property and that you schedule those activities before you travel. For instance, if we went down to Florida for two weeks and spent one day on rental property business, the trip would clearly be primarily for personal reasons. However, this doesn’t mean you can’t have fun on a trip that is primarily for business. Sandwiching the weekend is the key. Schedule some business at the end of the week and some at the beginning of the next week. This makes it necessary for you to stay the weekend, even if the trip was 100% for business. Okay, so let’s say we plan this trip. What can we deduct? Our schedule is as follows:
Vacation/ Work Trip Schedule
Friday: Meet with our property manager to inspect the property and have a lunch meeting to discuss how things have been going
Saturday and Sunday: Personal time with family
Monday and Tuesday: Meet with contractors in the morning to discuss a couple of potential repair projects. Head to the beach in the afternoon.
Wednesday: Travel home
Our major expenses and allowable deductions are outlined below. The IRS requires that we separate our personal expenses from business expenses before calculating our deduction. Personal expenses are those that would not have been incurred if it was only a business trip. For instance, renting surfboards or attending a concert. We will subtract personal expenses from our total expenses to get our tax deduction.
Flights: $800. If it had only been a business trip we still would have had to pay for flights to and from the destination, so these are 100% deductible.
Lodging: $900 ($150 per night; 6 nights). We had a business meeting on Friday and more the next week, so we would have had to stay over the weekend even if it was only a business trip. Thus, our lodging costs are 100% deductible. Note that the circumstances dictate what is deductible and each trip is different. For instance, if we had stayed another week past our business meetings or taken a week for personal time in between business meetings the lodging for those days would probably not have been deductible depending on the circumstances.
Meals: $500. Since we had to eat while we were there and our business required us to be there the entire time, we can deduct all our meal expenses. Keep in mind the IRS only allows 50% of these costs to be deducted, so in this case we can deduct $250. Also, the expenses pertain only to our meals; if we take my in-laws out to dinner their meals are not deductible.
Personal: Purchases such as renting kayaks, going to the movies, buying sunscreen, etc. are not business expenses because they are not required if it were only a business trip. Now, if you decide to take your realtor out kayaking to discuss potential investment properties, that could qualify as a business expense!
In total, we would have $1,950 in deductions. If we were in the 25% tax bracket, that would save us about $488 in taxes!
By spending a little time on business when you travel, you can save a lot of money in taxes. Note that these tax deductions only offset your rental income and not your active income (wages, other business income) unless you are an active real estate professional. However, if you have a destination that you love and regularly visit, it might make sense to consider investing in property there.