If you own a rental property, you’re probably familiar with the common types of expenses you can take such as mortgage interest, insurance, and property taxes. But one of the expenses that many landlords and property owners don’t consider is deducting vehicle costs for the miles they drive going to and from their rental property. If you use a property manager, this may not be relevant to you. But for landlords that visit their property often to do repairs or prepare it for new tenants, especially for short-term rentals, all those miles can add up to a significant deduction.
Can you deduct your miles?
Here’s a major “catch” to be aware of, and it’s one that many tax preparers aren’t aware of. The miles you drive from your home to your rental property or other business location are unfortunately generally not deductible because that is considered to be part of your “commute”. And your commute is never a deductible expense.
So if you drive to another location first, such as the hardware store, and then drive to your rental property then those miles are deductible because you’re not coming directly to or from your home, so it’s not considered to be your commute. But ideally you’ll want to be able to deduct your miles when you go directly from home to your rental, and there is a way to make that possible.
The Advantage of Having a Home Office
There is a way to make the miles between your home and rental property deductible. You can do that if your home is your place of business, which it can be if you have a home office. If your home is the location of your office, then your “commute” is just walking from one room of your house to another. And so the miles you drive from your home office to another location for business purposes, such as to visit your rental, are deductible.
Your home office doesn’t have to be a separate room of your house, it can be just a portion of a room. It could just be a desk and chair in a corner of a room, but it does have to be a space that is used exclusively for business purposes. It can be also used for other businesses you own, but it can’t be used for non-business uses.
There is a tax deduction you can take for a home office. But if your rental business operates at a loss, then having a home office won’t actually reduce your taxes because the home office expense can only be deducted if you are generating a profit. But you can still use the home office to qualify your miles as an expense.
Tracking Your Miles
You are required to keep a detailed log of your trips in order to qualify for the mileage deduction. The easiest way to do that is to use a phone app. A popular option is MileIQ, which runs in the background on your phone at all times and logs all trips you make, whether they are business or personal. And then later you can view a map of each trip and swipe to categorize each trip as either personal or business. MileIQ isn’t a free app, you have to pay for a yearly subscription to use it.
If you don’t want the app to record all your trips, there are other apps that you can turn on manually just when you are going on a business trip to your rental property. For that, Everlance is my preferred app (and it’s free!). Stride is also good and does the same thing, but I somewhat prefer Everlance’s interface and reporting features.
With any of these apps, they will keep track of the times and locations and miles for each of your business trips, and then you can generate a report at the end of the year and save that for your records. It’s a good idea to additionally take a photo of your car’s odometer at the beginning/end of each year so that you have that as additional evidence of the total miles you drove (the total miles, including business and personal miles).
Actual Expenses vs. Standard Mileage Rate
There are two methods you can use to calculate the vehicle expense on your tax return. The first is the “actual expenses” method. To use the actual method, you have to save receipts and calculate the actual amount you spent on gas, auto insurance, repairs, maintenance, registration, and other vehicle expenses. (Tickets are never deductible.) The deductible cost also includes a portion of the original cost of the car, which you typically need to depreciate (spread out) over a number of years. All of these costs are then multiplied by the fraction of “business” use of the vehicle relative to the total miles driven to compute your deductible vehicle expense. If the percent of business use is under 50%, you can’t use the actual expenses method.
The much simpler alternative is to use the “standard mileage” method. The 2023 standard mileage expense is $0.655 per mile. The standard mileage rate is considered to be an estimation of the total cost of using the vehicle, including gas, insurance, maintenance, repairs, and depreciation. The only vehicle costs that you can still additionally deduct when using the standard rate is your actual cost for tolls, parking fees, interest on a vehicle loan, while using the car for business purposes.
Note: If you start with the actual expenses method, you can’t later switch to the standard mileage method for the same vehicle. However, if you start with the standard mileage method, you can later switch to the actual expenses method if you want.
Using Section 179 or Bonus Depreciation to Deduct the Cost of the Vehicle
Section 179 offers the alluring ability to deduct the entire cost of a vehicle in one tax year. But section 179 can’t be used to create a business loss. So it would only reduce your taxes for the year if your rentals are operating as a taxable gain (but rentals are often at a tax loss thanks to depreciation).
Bonus depreciation is another option, and unlike section 179, it can create a tax loss. The actual reduction in your tax bill, however, may still be limited by the passive activity loss rules. And bonus depreciation may be for only a portion of the cost depending on the tax year the vehicle was placed in service.
The more challenging stipulation to use either type of accelerated depreciation is you would need to use it more than 50% of the driving miles for business use (and you need to log the miles to document that). And if your business use of the vehicle drops below 50% during the 5 year period after you buy the vehicle, you’ll have to report taxable income for “recapture” of some of the depreciation.
And then a final hurdle is there are limits on how much you can deduct if the vehicle is under 6000 pounds. And as of 2023, the limits also apply to SUVs even when they’re over 6000 pounds if they don’t have a separate cargo bed like a pickup truck.
If you sell the vehicle, there may be some additional taxable income from “recapture” of the depreciation you claimed.
If using either of these options for the depreciation of the vehicle, you can still use the “actual expenses” method described above to also deduct costs for things like gas, insurance, and repairs. But you wouldn’t be able to use the “standard mileage” method if you’re taking depreciation on the vehicle.
How much will you actually save in taxes?
Let’s look at an example. Using the standard mileage rate, if you drive 700 miles for business during the year, your deduction would be a little over $450. How much of a tax savings that translates into depends on your income bracket. But as an example, if your income is $150,000, then it would save you about $100 from your tax bill. So it’s up to you to decide if the tax savings are worth keeping a log of your driving miles. But if you have a property that is a significant distance away, or if it’s a short-term rental that you visit frequently, your miles could be in the thousands of miles, which could mean a much higher deduction from your tax bill.
Out-of-town (Long Distance) Rental Property Travel
If you’re traveling out of town to a rental property that is far away, you can additionally deduct other expenses for meals, lodging, and other travel expenses. But the first step is determining if it qualifies for that type of tax treatment. These are the qualification for taking a deduction for business travel:
- Location away from your tax home. Your “tax home” is the entire city or general area where your main workplace is (regardless of where you live). Your trip must be to a place that is outside your tax home, it can’t be located in the same general metropolitan area as your tax home.
- Overnight stay required. You can’t drive to the location and come back the same day. You have to stay “overnight,” or long enough to require you to sleep at that location.
- Must be for a business purpose. You have to have a legitimate “ordinary and necessary” business purpose for going there. So for a rental property, it can be to perform maintenance, show it to potential tenants, meet with a contractor, etc.
- Spend more than half of your time on business. More than half of your days on the trip must be spent on work related activities for the transportation and meals on the trip to be deductible. If more than half of the days are personal non-business days, then your transportation and meals aren’t deductible (but business expenses like renting equipment, etc., are still deductible). Lodging, meals, and other costs on personal days aren’t deductible. Weekends can be counted as business days if you are working on the Friday and Monday before and after the weekend, and it is more cost-effective to stay for the weekend than it would be to travel back home.
If you meet those requirements, it is a deductible business trip. In that case, you can deduct these expenses:
- Transportation costs: If you drive, then your driving miles are deductible just like regular work mile (see the previous section about that). Other transportation like airplanes, trains, and taxis are deductible using the actual cost of the transportation.
- Meals: Expenses for food and meals is 50% deductible.
- Misc. travel expenses: Other necessary travel expenses such as laundry and dry cleaning during your trip are also deductible expenses.
Expenses for other family members travelling with you aren’t deductible unless the family member is also going on the trip for business purposes.
FAQ
Does putting an ad or logo on a car make all the miles for the car deductible? No. You might think that driving around as a “mobile billboard” could make your vehicle or all your miles deductible as a business expense, but the tax law doesn’t support that position and the Tax Court rejected that argument in Willock v. Commissioner (2010-75). The cost of putting a logo on a car can be a deductible expense, but that doesn’t make the car itself deductible. The only thing that matters is whether each trip in the car is for a business purpose.
Claiming the mileage deduction is just one of the details to consider when preparing your taxes for your real estate rental. If you have other tax questions, or if you are looking for someone to do your taxes this year, please contact us for a free tax consultation.
