Summer’s here and everyone’s mind is on vacation! How does that fit into your “tax deductible” lifestyle?

Here’s the scoop: the IRS says that you can deduct expenses for taking a business trip. There is no reason the trip shouldn’t coincide with your next vacation. With proper planning, you can get your business to pay for your trip and make your vacation a tax write off!

For starters, the primary purpose and intent of the trip must be business. If there is no business purpose for your trip none of your expenses will be deductible. Now, as real estate investors, unless the destination is completely random, chances are you’ll find a way to do business there. Secondly, your expenses will need to be allocated between business days and vacation days. Our goal is to document as many business days as possible at our chosen destination.

Establishing a Business Day
A business day is defined as any of the following:

any day you are traveling to or from a business destination
a day when you have a pre-scheduled appointment (regardless of the length of time spent at that appointment), or
a day when you spend at least four hours on business.

What You Can Deduct
Generally, you can deduct all of your travel expenses if your trip was entirely business related.

When you make your vacation a tax write off, travel expenses include both transportation expenses and “on the road” expenses.

Many people combine these under one set of rules. However, they are treated differently; each category has its own separate rule base. What are the differences? Transportation expenses are those costs that you incur in getting to and from your destination. So the cost of your airfare or car costs would come under that category. If the business days of your trip exceed the non-business days the assumption is that your trip is primarily for business and all of your transportation costs are deductible. If non-business days exceed business days then none of the transportation costs are deductible, even though you may be able to deduct “on the road” expenses.

The “on the road expenses” include all costs necessary to sustain life while on your trip. These expenses include lodging, meals, laundry, dry cleaning, and similar expenses. These expenses must be allocated between business and vacation days, if any.

How Much You Can Deduct
There are two ways of deducting your business travel, the per diem method or the actual expense method.

Per Diem Method: The IRS allows for a set deduction per day when you travel. Every year, the IRS publishes a table (IRS Publication 1542) which specifies a per diem value depending on your destination. There is an amount specified for both lodging and meals and incidentals. Even if you spend less than your per diem rate, you can still take the entire per diem deduction. What I love about this method is that it doesn’t require receipts. You only need to document where you were! Imagine the possibilities.

One caveat: Sole proprietorships are not allowed to use the per diem method for their lodging deductions. However, all other expense are fair game as far as per diems go.

Actual Expense Method: This is pretty straightforward. Simply keep all of your receipts and add up the total amount of deductions based on what you have spent. The important thing is to make sure you keep the receipts for everything you spend your money on.

Deduct Expenses for Your Spouse or Significant Other
If you want to take trips with your spouse or significant other and deduct the travel expenses for both of you, you must have a justifiable business reason for bringing along that person. This usually occurs under three scenarios:

The individual is part owner of your business.
The individual is an employee of your business.
The individual is a business associate with whom it is reasonable to expect that you will actively conduct business.

This means that you can take individuals with you and deduct 100% of their business travel as long as they are directly associated with your business in any one of the preceding three circumstances.

Make Weekends Deductible
How would you like to treat Saturday and Sunday as business days without ever working on the weekend? You can – if you know what you are doing. As long as Friday and Monday are business days then Saturday and Sunday are business days as well – even if you party like a rock star on the weekend! This is a very popular strategy; however, its success rests on your ability to substantiate your claim that there was business activity on both Friday and Monday.

Records to Keep
Remember the old saying about real estate. . . Location, location, location. Well with the good old Uncle Sam the rule is. . . Documentation, documentation, documentation. Make sure that you set up a trip folder. Keep copies of e-mails setting up appointments with realtors. Take photos of properties you view. Take notes at meetings you attend. Keep copies of MLS print outs. Make sure your business appointments are recorded in your calendar. This all will establish the business intent and purpose of your travel. And remember, without business intent there is no deduction.

So, there you have it. When you are a small business owner (and as a real estate investor that includes you) the tax law turns in your favor. What were once personal non-deductible expenses have now become tax-deductible business expenses. With proper planning, you can literally make your life tax deductible.
Bill Walston is a full time real estate investor, mentor and tax strategist who supports his clients in growing, promoting and building their real estate businesses. To learn how to begin living your own tax deductible lifestyle, contact Bill by email. You can also follow Bill’s great advice on Twitter at
http://twitter.com/resherpa

Part 2

Feature Reader Request Article

(If you missed Part One, you can check it out here).

It felt like I won the lottery at tax time this year. My cheque from the government was five figures. I am not bragging about this, because the reality is that the sale of my Toronto Condo happened at a net loss to me after real estate agent fees and our Toronto tri-plex cost us almost $30,000 last year. So, the money I got from the government didn’t come close to easing the financial pain I experienced in 2006, but it did make me glad they were investments and not solely my homes. Had they been only my homes, that money would have been gone for good.

So, how can you maximize the tax write offs from real estate investments? Personally, I always consult my accountant. In over 15 years of using an accountant, I have only once paid him more than I have gotten back from the government. But, I don’t just rely on him, I do have a decent understanding of what qualifies as current and capital expenses.

First, the definitions. An easy way to think of a CAPITAL EXPENSE is that it provides a lasting benefit and improves the property beyond it’s original condition as most renovations do. If it’s a separate asset like a new stove or fridge then it can usually be treated as a capital expense. Typically these expenses are significant (in the thousands of dollars). Usually these expenses must be deducted over several years versus current expenses which usually get fully deducted in the year they are incurred.

Some examples of capital expenses include:

The purchase price of rental property,
Fees associated with the purchase of the property such as legal fees,
Purchase of furniture or appliances to go in the property,
The addition of a deck to the property, or the addition of another bathroom.

A CURRENT EXPENSE is generally something that repairs the property to its original condition, for example a coat of paint or repairing stairs. The expense is usually one that recurs on a regular basis and provides a short term benefit. Some common current expenses include:

Costs of renting the property out (property manager, advertising, cleaning costs),
Insurance on the property,
Interest on your mortgage (note that your principal repayment is not deductible),
Maintenance and repairs that restore the property or item to it’s original condition,
Property taxes,
Your hired help: accounting fees, property manager fees, cleaning people’s wages, consultants, lawyers),
Utilities,
Travel costs to collect rent, view or work on the property (note that this includes transportation costs but not typically lodging or food),
And office expenses that are directly related to your investment (things like long distance fax charges and telephone bills we have expensed but pens and paper we have not, although you can if it’s directly related to your investment activities).

Published:October 29, 2007

THE DISCLAIMER: Neither of us have any legal training, nor do either of us have extensive accounting training. We are not experts and we always consult with our accountants and legal counsel before we make decisions. We pay money to get quality advice when we need it and always advise our friends, family and readers to do the same.

Make Your Vacation a Tax Write Off

Tax Write offs from Real Estate

Part 2