How Buying Real Estate Overseas Can Reduce Your Taxes

Buying Property & Real Estate in Mexico
Puerto Vallarta|Margaret Summerfield

Recently someone asked me if it is possible to deduct the costs of travel related to investing in foreign real estate from your US taxes.

As always with the IRS, it depends.

The first distinction is between travel to research investment opportunities and travel to maintain your investments.

The bad news is that travel expenses to evaluate property in a foreign market aren’t deductible if you don't buy something there. That's because the IRS regards those expenses as startup costs, not ongoing business costs.

The semi-good news is that if you do buy a property in a foreign country, you can add the expenses you incurred during your research travel to the cost basis of the property and depreciate those costs over 27½ years.

The good news is that once you’ve acquired a property in a foreign market, travel to the same place to evaluate other potential acquisitions is tax deductible as a business expense.

Then, of course, there's the question of mixing personal and business travel. The IRS wasn't born this morning; they're not going to let you write off a two-week holiday in Cancun if all you did was change the locks on your rental property there.

Before we get to dividing up the purpose of mixed travel, the IRS distinguishes between ordinary and necessary travel related to real estate investments. The bottom line is that if you can easily get a local service provider or rental management agent to do something on your behalf, like changing locks or routine maintenance, the IRS isn’t going to allow that as a deduction.

They also don’t allow deductions for travel related to improving a property—only for necessary maintenance, meetings, or other activities that require your physical presence.

On the other hand, it's fine to claim part of your travel costs if the primary purpose of your trip was real estate issues that require your physical presence. But here it depends on the balance of time spent on business versus personal activities.

For example, if you go on a seven-day trip to Cancun and spend 5 days focusing on property business and two days at the beach, you can deduct your airfare as a business expense. But you can only deduct lodging, meals, and local travel costs for the five days you spent on business matters.

But if you travel and spend five days on holiday and two days working on your investment issues, you can’t deduct the airfare, only the local costs for the two days you were doing business. The division is straightforward—as long as you spend more than half of your time on business, you can deduct your airfare.

Finally, if you’re a couple, both spouses must be employees of your property business, and have a bona fide business role that requires their presence on the trip. Otherwise, you can only deduct half the cost of airfare and other expenses for the trip.

As I said, the IRS deals with this stuff all the time, so they're going to expect you to keep careful records of everything. Even if you think your risk of audit is low, make sure you keep every receipt, and maintain logbooks for everything involved in your foreign investment activities.

One thing that’s helpful in this regard is to open business bank and credit card accounts to use for investment-related travel and other activities. That's especially the case since the IRS is going to expect you to incorporate a proper business for your foreign real estate, like a limited liability company (LLC), and not a sole proprietorship with no legal paperwork.

And here's a bonus tip: thanks to 2017 tax “reform” bill, foreign property taxes for your rental properties are no longer deductible from your US taxes. Thanks, Congress!