Schedule C expense with no revenue

[tacks86]

My mother incurs travel and other small related expenses while considering prospective rental properties. Should I deduct such expense on a schedule C even if she never winds up buying a property?


Please confirm, thanks very much.

[Gretel]

As you say: She is considering.

Meaning not in business for anything yet. With rental properties you need to qualify as real estate professinal to have a schedule C business.

[JoshinNC]

Is your mother in the business of providing rentals?

My mother incurs travel and other small related expenses while considering prospective rental properties. Should I deduct such expense on a schedule C even if she never winds up buying a property?


Please confirm, thanks very much.

Or does she have a day job, and own rentals as an investment/additional income?

Your answer to that question will answer your original question (kinda).

[Luis Mopeo]

Interesting question. From the info provided, I don't think mom is a real estate professional or a real estate dealer.

Costs associated with checking out prospective rental properties.

Capital expense added to basis?

Investment expense deducted on Schedule A subject to 2%?

Nondeductible personal expenses?

I vote nondeductible personal expenses. I'll say why, but I'd like to see other opinions.

[jainen]

my time on a cruise

>>if she never winds up buying a property?<<

Whether such travel expenses can be deducted does not depend on the results. They can NEVER be deducted under any circumstances. Expenses of acquiring a property are capitalized as part of the property itself, and could create a loss if the deal falls through.

There are two problems (actually, many more than two, but I don't have all morning). First, the expenses must be for a SPECIFIC property. If you take a cruise to Hawaii just because you have heard there is a good rental market there, you can't capitalize the expenses even if you actually purchase a house.

Second, the specific rental activity must be the PRIMARY purpose of the travel. If you look at houses, even a specific house, while you are on your cruise to Hawaii, only direct expenses can be capitalized unless you spend more time looking at that specific house than looking at everything else combined. (That includes looking at yourself in the mirror, a personal activity which always takes up all my time on a cruise.)

[tacks86]

My humble thanks go to all of you who answered this question.

[Luis Mopeo]

I agree with Jainen. The principle is stated on page 8-18 of TTB under "What if the Business Never Starts?"

Expenses incurred before a decision is made to acquire a specific business are nondeductible personal expenses. Expenses incurred after a decision has been made to acquire a specific business are capitalized start-up costs.

Specific to the original question, costs associated with "considering" rental property are personal expenses and are nondeductible. Costs associated with "acquiring" a specific property would be capitalized and added to basis.

[Davc]

As you say: She is considering.

Meaning not in business for anything yet. With rental properties you need to qualify as real estate professinal to have a schedule C business.

Being a "real estate professional" does not make it a Schedule C activity. It only means your rentals are not subject to the passive loss limitation.

[erchess]

hmmmm.........

In the Epistle of James there is a statement that the King James Version translates "Ye have not because ye ask not." Taxes work that way.

The most obvious part is that rental real estate is a Schedule E activity. (Rental activity can be consistent with being a Real Estate Professional but relatively few people put over half of their personal service time and 750 personal service hours a year into such activities.)

I would treat expenses of considering and rejecting a particular property as investment expenses. If the client does not itemize, then he or she must not have a mortgage which means that he or she is either debt free or foolish.

I would treat expenses of considering the purchase of a property actually bought in one of two ways, depending on how assertive my client wanted to be. The assertive treatment would be to claim them on Schedule E, usually as legal and professional or travel or transportation expenses. The safer thing to do would be to add them to basis. Unfortunately, I know of no authority for amortizing them.

I have by the way always been told that a Schedule C with no income may be technically legal but is almost like writing a note to the IRS suggesting an audit.