Travel outside U.S. to inspect rental

[think2much]

IRS Pub 463: "If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense.

Does "investment purposes" in this context include management of a rental property? I'm wondering because a rental activity is generally not considered a trade or business.

Or can my client's travel outside the U.S. to inspect her rental property be considered business-related (as in a domestic rental), so she can deduct a portion of her round-trip airfare based on the ratio of business to nonbusiness travel days?

[think2much]

Travel outside U.S. to inpect rental

Any opinion? Thanks.

[Bees Knees]

good question

Rental real estate activities are both investment and business. The courts have treated rentals as business activities for things such as office in home, provided the taxpayer actively participates in the activity as if it is a business. On the other hand, Section 1402(a)(1) says rentals from real estate are not subject to self-employment tax, even if the taxpayer actively participates.

I think the main reason rental real estate activities are given this in-between status is because of that code section that says income is excluded from self-employment tax. In every other aspect, they seem to be treated as a business. For example, you deduct all expenses on Schedule E which flow to the front of the 1040. Investment expenses are deducted on Schedule A subject to the 2% AGI limitation.

So how does this answer your question? It doesn’t. Neither does IRS Pub 463 because it does not define what it means when it says “investment purposes.” I have always treated rentals as business activities for all practical purposes except where the rules are clear they are not a business.

[Bees Knees]

TTB mentions treating a rental as a trade or business for purposes of the office in home rules on page 5-14:

Trade or Business Use Test—Business Use of Home
To satisfy the trade or business use test, the portion of the home
used for business must be used in connection with a trade or
business. If the business use is for a profit-seeking activity that is
not a trade or business, the deduction is not allowed.

Example: Kathy uses her den exclusively and regularly to read financial
periodicals and reports, clip bond coupons, and to carry out similar
activities related to her investments. She does not make investments
as a broker or dealer. Her activities are not part of a trade or business
and therefore, she cannot claim a deduction for the business use of
her home.

Court Case: A taxpayer was an employee for a hospital. In addition, he
owned six rental units held for the production of income. The IRS denied
the office in home deduction for the rental activity as it was not a trade
or business. The court allowed the deduction and noted the personal
efforts of the taxpayer to manage six units in seeking new tenants,
in supplying furnishings, and in cleaning and otherwise preparing the
units for new tenants. These activities were sufficiently systematic and
continuous to place the taxpayer in the business of real estate rental.
(Curphey, Tax Court, February 4, 1980)

I think the key point in that court case is the taxpayer performed the type of activities that one would do as if it were a trade or business. If the taxpayer was merely a passive investor in the rental activity, he would have not won the court case.

So I guess the in-between status of rental real estate is a facts and circumstances issue. It is a business when the taxpayer treats it like a business. It is an investment activity when the taxpayer treats it like an investment activity. The treatment of expenses subject to various limitations depend on these facts and circumstances.