Like all other expenses, whether travel is deductible depends on the facts and circumstances of the travel. All travel can be deductible if your facts are right. One of our School of Tax Strategy students asks the following question about deducting international travel.

Q: Hello Tom, I was just on your travel, meals, and entertainment call and was not able to ask my question as time really flew by. So, my husband and I are going to Mexico in March for vacation for a week and I was wondering if there is ANYWAY we can make the trip or at least part of the trip be deductible? If so, what do we need to do and how do we document it? (We did purchase our two first rental properties in December 2010 that have been bringing in rent from day one). Also, as I am from Sweden I tend to want to fly home every so often... is there something I can do to make those travels deductible? Thank you for teaching what you know! /Helena from Philly PA

A: In order for your trip to Mexico to be deductible (or your trips to Sweden), you must be traveling for business. You could be traveling to hold a business meeting, such as an annual shareholders meeting, or you could be traveling to research and purchase real estate (your business). You must be able to show a true business purpose for the travel and that the travel is ordinary and necessary. In our course, Travel, Meals and Entertainment, we go through in detail how to determine whether your travel is ordinary and necessary.

One other thing for international travel. You don’t have to spend all of your time, or even most of your time on business to get a portion of it deductible. Whatever portion of the time you spend on business is the portion you will get to deduct. This is different than domestic travel, where it’s all or nothing.

Warmest regards,

Tom

The greatest tax benefit from real estate ownership is that you get to take a deduction for something that doesn’t cost you anything. That deduction is called depreciation. Even though you expect your property to increase in value, you still get a deduction as if it were decreasing in value. Typically for a residential rental property, that deduction is about 3.6% of the cost of the building. However, you can increase the percentage by doing a cost segregation. A cost segregation is a study performed by a CPA or engineer on the building to determine how much of the building and land is something other than just a building, such as content and land improvements. Here is a question about cost segregations from one of our students.

Q: I am in the process of purchasing a MHP that has mostly owned mobile homes and some lots that are rented out. My question is, if we specify in the purchase contract how much of the purchase price is for land, how much of the purchase price is for personal property (homes), how much of the purchase price is for Goodwill and how much of the purchase price is for land improvements within reason can we use those numbers for our depreciation calculations with the IRS? This would eliminate the need for a Cost Segregation Study and give us some flexibility to maneuver the dollars allocated to each type of depreciation. The Seller of this property has no issue with allocating the dollars as we see fit. This property is in the State of Oklahoma if that makes any difference.

A: The short answer is that you still need a cost segregation to maximize your depreciation deductions. Mobile homes are not personal property. They are considered real property and are depreciated as buildings over 27.5 years. So, to maximize your depreciation you still need to do the study.

However, separating the land and buildings in your purchase contract is still a good idea as it helps to establish what is land (nondepreciable) and what is depreciable property. For more on depreciation, see our guide, “The Magic of Depreciation” at www.provisionwealth.com/products.

Warmest regards,

Tom

In this economy, a lot of people are starting to take control of their own investing and financial endeavors. Many of our readers have never owned a business or managed their own investments. There are, of course, serious tax consequences to active business and investing to go along with all of the wonderful tax advantages of active business and investing. Karie asks the following question about her new investing career.

Q: I am a new investor, setup an LLC like Robert suggested and now don't know where to start. All our money is in our names not sure how to roll it over to the company. We purchased our first home in September, rehabbed it and have renters in the home with a cashflow of about $250. All money that was out of pocket came from our current account. I was looking into getting Quickbooks which I feel will benefit us. I have been keeping all receipts for our expenses and now we have revenue. How do we get started to make sure our first year taxes go smoothly.

A: First and foremost you must keep good records. Quickbooks is always a good idea. Second, you must find a tax advisor/tax preparer who understands your business as well as understanding how to reduce your taxes. Real estate is a complex area of the tax law and requires a specialist. I suggest you find a firm that specializes in real estate investors. If you don’t have someone like this already, feel free to call our office at 866.467.5809 to find out if our firm, ProVision, would be a good fit for you.

It is very important that you start out the right way. This will take a lot of stress from you. I applaud you for recognizing this. There are several more questions you will need to answer. How should your LLC be taxed? How do you maximize your depreciation deductions? How do you get money in and out of your business without bad tax consequences? All of these should be answered during your Tax Strategy with your tax advisor.

Warmest regards,

Tom