Can a landlord deduct their car expenses on their tax return? For those landlords that are actively involved in the management of their properties, the answer is usually yes. However, caution must always be exercised when the IRS may be involved. Therefore, this article outlines the manner in which automobile deductions can be taken – just be sure to document as much as you can as far as your vehicle activities are concerned. Audits are rare for individual owners, especially for returns that total less than $1 million, but if you happen to be one of the lucky ones – it’s best to be prepared.
Transportation Must be for the Rental Property
Regular daily activities such as dropping off or picking up your children at school cannot be deducted. Only transportation to and from the rental property or to related destinations such as banks, hardware stores, accountants, attorneys, etc. can be counted as legitimate automobile usage. A more elaborate list to spark your imagination has been provided below as to where you can travel to or from:
- Rental property.
- Principal place of rental property business such as an office, even a home office.
- Any place to meet individuals such as tenants (or potential applicants), contractors, real estate agents, insurance agents, attorneys, accountants, decorators, vendors, etc.
- The local bank for your operating or security deposit accounts.
- Hardware stores if you buy your own supplies or materials for DIY maintenance or even to assist professionals by ordering or prepaying for materials.
- Local government offices for tax collection, court filings, etc.
Important Note: Even if you don’t do all of the actual driving, as long as you have someone (relative, employee, friend, etc.) use your vehicle for any activity directly related to the management of your rental property, it will usually be a permissible deduction.
There’s No Place Like Home
The day always starts from home, but the question is whether the use of your vehicle to and from home is a deductible expense. It all hinges on whether you have what’s called a “home office.”
Travel deductions are a plenty for those that operate their rental property business out of a home office. So what’s a home office? A home office is a dedicated area in your home (maybe an extra bedroom, den or converted garage) that is used solely for the purpose of managing your rental property. So if you happen to be a self-employed accountant, then the area would probably not count as a home office unless being an accountant is merely part time and its primary purpose is to support the rental property business as your primary bread and butter.
No Home Office
Without a dedicated home office, any transportation becomes a one way ticket. Automobile deductions from home are prohibited because they are determined to fall under what’s called the commuting rule. Commuting is when you drive from your home to your job – in this case, your rental property and its related destinations such as your management office, bank, realtor, etc. Unfortunately, according to the IRS, these types of expenses are considered personal and nondeductable when they occur from home. On the plus side, you can deduct transportation that occurs from your rental property to any of its related destinations and back and forth, just not back home.
How Much can be Deducted?
There are two options available for deducting your travels. As long as you drive a standard vehicle (including vans and pickup trucks), you can choose between the two following methods for deducting your vehicle expenses:
Standard Mileage Rate
This method is very simple and requires just two numbers: 1) the number of qualified miles you drove; 2) the amount the IRS will allow to be deducted. The IRS publishes the amount you can use for each mile. Just multiply the number of qualified miles by the IRS standard mileage rate and then fill in the blanks on your return. When you’re ready, just visit IRS.gov to search for the applicable tax year’s mileage rate.
Actual Expense Method
Without a doubt, the standard mileage rate is the easiest way to calculate transportation expenses. However, if you’ve driven quite a bit and retained all of your vehicle receipts and documentation, you can usually achieve a much higher deduction. Just be sure to start on the first of the year if you wish to use the actual expense method and track how much you spend for gas, repairs, etc.