When are Travel Expenses Deductible?

You never know where your real estate investing will take you across the country or even the globe. As such, it’s important to know when certain business trip expenses are deductible, and when they are not.

Better yet, if you learn these rules you can strategically plan for your business trips to be tax-deductible even if they include personal leisure time.

In this article, we’re going to break down the basics of travel within the U.S.A.

Traveling Away from Home

In order to deduct travel expenses, you must travel outside of your tax home and stay overnight (IRC Sec. 162(a)(2) and Rev. Rul. 75-432).

Your tax home generally means a 40-mile radius around your primary residence.

It’s important to emphasize that you must stay overnight in order for your travel expenses to be deductible. If you took a day trip to a seminar in another state and returned home that night, you may not have deductible travel expenses.

You would be able to deduct the round trip miles or the airline ticket, but you wouldn’t be able to deduct other travel expenses like meals.

Local travel is deductible under a separate set of rules not covered by this article.

Know What a Business Travel Day Is

In order for a trip to be considered a business trip, more than half of the days need to be business travel days. For a day to qualify as a business travel day, it must be one of the following:

Transportation day: you may count, as a business day, any day in which you are transporting yourself in a reasonably direct route to your overnight business location. You cannot deduct mileage or costs associated with side trips en route to your destination (Treas. Reg. Sec. 1.274-4(d)(2)(i)).

Work 4+ hours: If you spend half of the normal business hours (i.e. 4+ hours) in the pursuit of business, your will count it as a business travel day.

Presence-required day: if anyone requires your presence at a particular location away from home, that day will count as a business day. Perhaps you are required to show up physically for a closing, or you need to go to court to evict a tenant… these days are business days.

Weekend days: if it is impractical, whether due to time or expense, for you to return home from your business destination for the weekend, then your weekend days can count as business travel days even if you conduct no business. This is commonly referred to as the “Sandwich Day” rule. To make it work, you would need to be traveling far away from your tax home (to make travel back just for the weekend “impractical”) and you will need to conduct business on Friday and Monday. In doing so, Saturday and Sunday will be considered business travel days regardless of how much business was conducted. A few-hour card ride will not be viewed as “impractical” by the IRS whereas a cross-country flight would be impractical.

Can I Work On and Stay At My Own Rentals and Count Them as Business Travel Days?

Yes, you can and should be strategic about spreading out the repair and maintenance work you plan to do on your rentals during your trip.

If you work at least four hours per day on your rental, the day will count as a business travel day even if you are staying at your rental.

Though not directly related to business travel expenses, this concept was recently discussed in a Tax Court Case:

A taxpayer is deemed to have used a dwelling unit for personal purposes when, for any part of a day, the taxpayer or any member of the taxpayer’s family uses the unit for personal purposes or any individual uses the unit unless a fair rent is charged for the use. Days spent primarily repairing and maintaining the unit will not count toward personal use merely because other individuals on the premises are engaged in some other activity.

… on this point we accept his broader claim that most of his trips to the property were for upkeep. If we accept his testimony that every trip petitioners made to the Sea Ranch property, other than at Christmas, was for repairs or maintenance, then the time they spent at the Sea Ranch property for personal purposes totaled fewer than 14 days in each year.

Lucero v. Commisioner, T.C. Memo. 2020-136

Deductible Travel Expenses

If more than half of your days are business travel days on your business trip, then on your business travel days you can deduct:

• Transportation expenses: air, train, and bus fares; driving expenses, including car rentals and taxis; and shipping costs for luggage and checked bag fees
• 50% of your meal and beverage deduction (100% in 2021 and 2022)
• 100% of your lodging expenses
• Internet fees
• Computer rentals
• Laundry and dry cleaning fees
• Tips for services

As you can see, it’s important to classify as many days during your trip as business travel days to take full advantage of writing off the costs of your trip. For any day that is considered a personal day, you will be unable to deduct these costs.

Travel Costs to View Real Estate Properties for Sale

In an earlier part of this article, we made the statement that in order for your trip to be a business trip, more than half the days must be business travel days.

But before we start planning our trip, we should ask ourselves whether or not we are in business and where we are in business.

Travel costs will not be deductible at all unless you are currently engaged in a trade or business, the travel costs are related to that trade or business, and they are ordinary and necessary for that trade or business.

This means that if you are simply investing passively into real estate deals as an investor, your travel costs will be non-deductible (Frank v. Commissioner, 20 T.C. 511).

Most landlords, however, are in the trade or business of being a landlord. This has been established through prior case law and even owning one rental property can qualify for rising to the level of being a trade or business.

When a landlord incurs travel expenses to look for properties that they eventually purchase, the travel costs are capitalized to the basis of the property the landlord ends up buying (Rev. Rul. 77-254).

When a landlord incurs travel expenses to look for properties that they don’t end up buying, the travel costs can be deducted as an operating expense currently only if the landlord is already engaged in a rental business within the geographic area the travel took place (O’Donnell v. Commissioner, 62 T.C. 781).

So be careful deducting travel costs to new geographic areas that you don’t have business activity in. Your travel costs may not be deductible.

How to Audit Proof Your Travel Cost Deduction

Below are audit protection tips we have developed in servicing our clients over the years:

• Plan your trip carefully and use the Sandwich Days rule to your advantage. Remember, more than half of the days you are traveling need to be considered business days to maximize your deduction potential.
• Spend more than four hours of travel toward the business destination
• Spend more than four hours on your business, or a combination of travel and business
• Document business meetings with a calendar or planner
• Save notes on people you meet with during your trip and how they relate to your business
• Keep copies of emails documenting your trip or plans for your trip

Takeaways

If you carefully plan your business trips, much of the cost can be deducted through the ordinary course of your trade or business.

But you have to make sure you already have a trade or business, otherwise, your trip expenses are likely not deductible.

If you are simply a passive investor in real estate deals, there’s a high likelihood that your trips are not deductible.

You can, and should, audit-proof your travel deductions by documenting your travel, receipts, and meetings.