I have a question regarding expenses that can be taken in a real estate business.
Loosely defined, my wife, a partner and his wife and I, and now some other couples have several LLC’s with which we purchase “Hotel-Condos”. They way a hotel condo works is that you get to purchase a condo or a hotel room and it is rented out for you via the hotel or a management company. The hands on part of having to manage the property becomes a lot simpler and much less of a headache.
We live in Michigan and own or have purchased markers on several of these properties in Florida and Michigan. We have taken several trips to Florida over the last year, and we believe that all these trips are expensable, or a write-off, if the LLC that we are operating in has not made any money yet. And if they are making money, these trips come right off the bottom line as expenses.
My tax man is telling me that the only expensable trips are the trips where I actually own the propoerty - not the trips where I am specualting or hold a right to purchase note. If I am doing business, why isn’t the trip expensable?
CAn someon pleaes clear this up for me? The books are vague - it seems that if you can justify the expense and are willing to defend it in an audit, than that is the answer. If you have a tax man who is unwilling to do that, for whatever reason, than that is the answer.
I’m no accountant but I believe if you have no vested interest in a property, then you have nothing to deduct it against. However, if you put in offer’s to purchase, even if unsuccessful, the attempt to own property was there, therefore deductible.
So next time you go to Florida, not owning something, put some offers in while there and deuct the whole trip!
To have a deductible trip, especialy to a place like Florida, you need to have at least the following:
A trade or business, as opposed to a mere investment. There’s lots of case law that distinguishes one from the other. The primary distinction is level of activity. A business takes significant time & hands on involvement (such as most rentals that are managed at least in part by the owners), while an investment tends to be pretty hands off (stock, even if time is spent researching them). Mere ownership of the timeshares or the like does not qualify as a business, in my personal opinion. I would think a higher level of activity of business would be needed.
You must be able to document that the majority of time on the trip was spent for business reasons - and I mean REAL business reasons. Attending a seminar that’s on point (for a BUSINESS, not an investment), actually managing the properties and the like qualify. Looking for other properties, staying in the investment property itself or having a meeting with the project promotors for a few hours and “scouting the local business climate” are EXTREMELY unlikely to pass muster.
In short, I doubt that the investment described (passive in nature) rises to the level of a business. Even if it did, it strikes me as unlikely to generate sufficient legitimate business hours on the trip to qualify the trip itself as “primarily” for a trade or business.
Thanks for the reply. We are a business, a business that invests in real estate. One property I own in Orlando I purchased from a developer, that is, we built the house, interviewed several (3) management companies, and are now looking again, and made three different trips down for furniture selection, final sign-off and other details.
I would strongly consider this a “hands on” activity, even though the income is passive.
However, the other properties, hotel condos, may be more like other investments - even though they are unsecured, and may involve a lot less actual activty- on sight - from my side - short of filling out the purchase form and handing over a check… However, a lot of work as to whether or not the property will cash flow, specualtion on appreciation, and other “homework” goes into the investment. So - where does the line get drawn ??? Is it all up to an auditors interpretation? I feel that some of the work I do for the these types of investments, even though there is no physical toll or necessary expenditure - is just as critical to the business as selecting the right furniture and property management company.
My business keeps minutes, books, monthly cash flows, etc. I don’t log hours, but I can start doing that - would that help justify the expenses when I travel to check out a potential property investment?