Mileage for 1031 exchange

[BulldogTom]

TP exchanged Rental in CA for Rental in ID.   While the CA rental was under contract but before it closed, he went to ID to look at property with a realtor, identified the property he wanted, and completed the exchange 1 month later.   I think the travel to ID should be allowed as a deduction (it was critical to him completing the exchange), but I am not sure where to put it.  I don't think the CA rental is correct, but the ID rental was not in his possession at the time of the travel.   Is it part of the exchange costs for calculating deferred gain?

Thanks

Tom
Longview, TX

[jklcpa]

Because this is to acquire the property, I would treat this as an addition to the cost of that property.

[Sara EA]

I think the mileage would be a start-up cost.  He closed a rental enterprise and is starting a new one.  Travel would be a deductible expense if already in business, not a capital one. The capital investment is a different category.  Here's a quick reference:  https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes

[Lee B]

I believe startup expenses relate to being in or beginning an active trade or business.

This taxpayer may or may not be in or starting an active trade or business.

If not, I would either add it to the cost of the property or it would be not deductible.

[jklcpa]

To answer Tom's original question, "Is it part of the exchange costs for calculating deferred gain?,"  no, these costs do not belong in the exchange calculation on the 8824.

Tom will have to decide whether or not it is recoverable as a start-up cost on Sch E.  From the way Tom worded his original question, it sounded to me as though the Idaho property was already an existing rental. Especially if there is a current existing tenant(s), I would still say to capitalize the travel. From Sara's link, see the last section, specifically the last sentence, about purchasing an existing business.

For Tom an anyone else not wanting to click Sara's link, here is the complete text from the IRS site:

Quote

IRS Tax Tip 2021-166, November 9, 2021

When starting a business, owners should treat all eligible costs incurred before beginning to operate the business as capital expenditures that are part of their basis in the business. Generally, the business can recover costs for assets through depreciation deductions.

For costs paid or incurred after September 8, 2008, the business can deduct a limited amount of start-up and organizational costs. They can recover the costs they cannot deduct currently over a 180-month period. This recovery period starts with the month the business begins to operate active trade or as a business.

Business start-up costs

Start-up costs are amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and to produce income in anticipation of the activity becoming an active trade or business.

Qualifying costs

A start-up cost is recoverable if it meets both of the following requirements:

• It's a cost a business could deduct if they paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into.
• It's a cost a business pays or incurs before the day their active trade or business begins.

Start-up costs include amounts paid for the following:

• An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
• Advertisements for the opening of the business.
• Salaries and wages for employees who are being trained and their instructors.
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
• Salaries and fees for executives and consultants, or for similar professional services.

Nonqualifying costs

Start-up costs don't include deductible interest, taxes, or research and experimental costs.

Purchasing an active trade or business

Recoverable start-up costs for purchasing an active trade or business include only investigative costs incurred during a general search for or preliminary investigation of the business. These are costs that help in deciding whether to purchase a business. Costs incurred to purchase a specific business are capital expenses that can't be amortized.

 

 

[BulldogTom]

How about this - the TP is already "in the business" of renting property to a tenant, and he continues to be "in the business" of renting property to a tenant.   The only thing that has changed is the location of the business property rented.  It is just a continuation of the same activity.

Flimsy, very flimsy.

Tom
Longview, TX

[Jim Oh Bkkr]

18 hours ago, jklcpa said:

include only investigative costs incurred during a general search for or preliminary investigation

But the SECOND to last sentence describes Tom's situation as I read it???

[BulldogTom]

Start up cost it is.   IRS allows you to expense 5K of start up cost in the first year (rest is capitalized over 180 months), so it goes on the ID rental Schedule E.   Works for me.

Tom
Longview, TX

[jklcpa]

4 hours ago, Jim Oh Bkkr said:

But the SECOND to last sentence describes Tom's situation as I read it???

And that is why I said Tom must decide how this applies to his client's specific situation because I did not want to continue making assumptions and (probably again) misinterpret what was meant by the original post or what was included in the client's "travel."

2 hours ago, BulldogTom said:

Start up cost it is.   IRS allows you to expense 5K of start up cost in the first year (rest is capitalized over 180 months), so it goes on the ID rental Schedule E.   Works for me.

Tom
Longview, TX

Tom, if the travel was only pre-purchase and investigative in nature, that would be start-up, but if once the property was identified and if client incurred additional travel or other costs to attend the actual closing and purchase of the ID property, those subsequent costs would be capitalized.

[Lee B]

3 hours ago, BulldogTom said:

Start up cost it is.   IRS allows you to expense 5K of start up cost in the first year (rest is capitalized over 180 months), so it goes on the ID rental Schedule E.   Works for me.

Tom
Longview, TX

Tom,

I encourage you to take a deeper look at whether your client is in an active trade of business?