For those of us who have cars, they are probably one of our bigger expenses each month. Between car payments, car maintenance, toll fees, and gas costs, they can add to up a hefty amount throughout the year. This is probably the reason some of the most common tax questions I get from real estate investors relate to cars and how to best utilize them for tax savings.
This week, I wanted to take the time to go over some of the FAQs that I as a tax strategist get all the time to hopefully provide some useful tips you can use. Keep reading, as some of the answers to these commonly asked questions might surprise you.
FAQ No. 1: Should my car be purchased by my business?
For investors with legal entities, this is a question that I get time and time again. The answer is: It depends. There is a common misconception that for car-related expenses to be deductible, the car must be owned by a legal entity. Another common belief I hear is that the car expenses must be paid for with company money in order to be a tax deduction.
The truth is, both of these statements are incorrect. The IRS allows you to write off business-related car expenses regardless of whether the car is owned by the company and regardless of whether the payment is made by the company. As an investor, you can deduct car expenses that are incurred with respect to your real estate activities.
For example, let's say you purchased your car in your personal name and you pay for all the gas and maintenance with your personal expenses. Let's assume you drove 2,000 miles for real estate activities last year. This means that part of your car expenses relating to those 2,000 miles may be tax deductible to offset your tax returns.
FAQ No. 2: Can I write off the miles that I drive from home to work?
This is another common question that I am asked on almost a daily basis. The answer, again, is: It depends. Under IRS rules, we cannot write off our commuting miles. So if you're a real estate agent and you work exclusively from your broker's office, then the miles you drive from your home to your broker's office every day is not tax deductible. Those are considered commuting miles.
Now let's take another example: Once you get to your broker's office, it's likely that you then drive around to look at properties, meet with clients, or even drive clients around to look for properties together. In this example, all this driving time and expenses from your broker's office to these various locations are considered tax-deductible items.
Here is yet another example: Let's say you work from a broker's office from time to time, but you also have a dedicated home office where you perform most of your work. In this scenario, the drive from your home to the broker's office becomes tax-deductible expenses. In addition, all the expenses of driving from the broker's office to the various locations are tax deductible.
In fact, if you have a home office, then for the most part, any business-related miles from your home office to a secondary location may become tax deductible. I once had a client who was living in San Diego County while he covered the real estate area for all of Los Angeles County. So a few times a week he would drive over 200 miles round trip for his real estate. Since he had a home office, that made the entire drive tax deductible for this taxpayer.
FAQ No. 3: Do I have to keep my receipts?
The answer is ... it depends, of course!
No one likes to keep receipts. I completely understand that, and I am no exception to the rule. All those little pieces of paper take up room in your purse or your car.
Clients often ask me if they should keep receipts if they are taking the standard mileage deduction for their car expenses. The answer, as you may have guessed, is: It depends.
One of the perks the IRS provides is the ability to take the larger tax deduction of standard mileage or actual expenses. In addition, they allow the taxpayer to potentially change between the two methods from year to year. For example, if the standard mileage provides you with the larger tax deduction this year while the actual expense method provides you with the larger deduction next year, you are generally allowed to switch back and forth.
Because the IRS allows us to write off the larger of mileage or actual expenses, it generally makes sense for us to keep track of our actual costs and receipts so that we can make that analysis each year. There are also certain expenses that can be deducted on top of standard mileage deductions.
It is not a problem to simply keep track of your mileage and take the standard deduction. Just keep in mind that if you take this shortcut method, you may be cheating yourself out of some tax savings. So to maximize your tax-saving possibilities, the recommendation from me is to keep track of both miles driven and total car expenses. That way, you can make sure you aren't overpaying Uncle Sam.
This article originally appeared on BiggerPockets.