Rental Property Meals

By Jason Watson, CPA
Posted Tuesday, August 27, 2024

You cannot deduct your meals as business meals unless your rental property or real estate activity is considered a business (we discussed this legal threshold in our Section 199A and business entity sections), and you fall under one of two situations-

• You are meeting a client or tenant, prospect or other business associate (or a small group such as 12), and discussing business matters which can include rental property issues such a reviewing the lease, or

• You are away from your tax home where you require substantial rest (such as an overnight trip), and that trip has a business purpose specific to the operation of your rental property.

As such, if you cruise through the Starbuck’s drive-through and grab your triple grande vanilla breve on the way to doing a repair on a rental property, no good. However, if you are traveling away from your tax home for business purposes including that same rental property repair, and that travel requires substantial rest, then order the venti. Live a little.

How about draining that same breve while meeting your real estate attorney to discuss an eviction? This works too.

Sidebar: The reason business meals are deductible is the presumption that the meeting was the primary objective, and by happenstance occurred while eating a meal. The business purpose is the meeting, and the meal is incidental to the meeting.

Your meal tax deduction is limited to 50% under both circumstances (the 100% that we enjoyed for all meals was only for the 2021 and 2022 tax years, so we are back to the same old same old).

The theory on this is straightforward- you must eat regardless of owning a rental property or not. In other words, your meal is not contributing directly to the operations or success of your rental property activity. The IRS is clever- they don’t mind giving you a tax deduction today on something that eventually will result in taxable income through growth and profits in the future. Think of it this way- if you had a regular W-2 job, you wouldn’t be able to deduct your meals. Why would that change with your shiny new rental property?

Meals Compared and Contrasted with Travel Deduction

In a previous section we discussed the rental property travel deduction. The two fundamentals in that discussion were travel away from your tax home and home office, with a ton of little details in between such as existing rental properties and geography.

Deducting your meals is similar but different all the way. On one hand, travel away from your tax home requiring substantial rest such as overnighting in the rental property for repairs, or a hotel allows you to deduct meals as business meals. On the other hand, you can be meeting your real estate broker or mortgage lender at a deli down the street from your home (with or without a home office), and that meal is also a business meal.

Meals During Acquisition

In playing off our travel deduction examples in another section, let’s say you’ve identified a nice rental property in Miami. You travel there four different times to a) do an initial walk-through, b) be present for inspections, c) sign-off on a seller repair and contingency and d) final walk-through and closing. You must eat right?

Assuming that your trips to Miami required overnight rest, or that you met with a business associate (real estate broker or prospective tenant), and happened to eat a meal during the meeting, the meals associated with these four trips to Miami would be considered acquisition costs (not start-up expenses) and added to the purchased rental property’s cost basis and depreciated accordingly.

This aligns with the general premise that a real estate investor or rental property owner might incur costs that facilitate a transaction, and they include such things as commissions, advertising fees, appraisal fees, meals, travel, and professional fees.

However, if you already owned a rental property in the Miami area, then these same meals would be deductible as operating expenses. Either way, they would be limited to 50% to remain consistent with the treatment of meals. Keep in mind the subtle difference between costs and expenses as we outlined in our rental property travel deductions section.

Deduction Rental Property Per Diem

Sole proprietors including single-member LLC owners, and partners in a multi-member LLC are allowed to deduct the federal per diem rate for meals. Lodging can only be deducted using the actual cost of lodging. This means that as a rental property owner operating the activity as a business can use per diem for meals allowance when away from their tax home on business travel.

Where are S corporations for those real estate brokers, property managers, and fix and flippers? You are not going to like this. Employees of corporations are eligible for per diem allowances, reimbursements and deductions unless this same employee owns more than 10% of the corporation.

This means that most S corporation shareholders are hosed, and can only deduct (or get reimbursed) for actual meal costs. IRS Revenue Procedure 2011-47 has this limitation and IRS Publication 463 Travel, Gift and Car Expenses states in part “A per diem allowance satisfies the adequate accounting requirements for the amount of your expenses only if…you are not related to your employer.”

You are related to your employer if-

• Your employer is your brother or sister, half-brother or half-sister, spouse, ancestor, or lineal descendant,

• Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or

• Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer.

Meals Deduction Summary

Assuming your rental property activity is a business and not an investment, here is a summary again on deducting meals as rental property tax deductions-

• You are meeting a client or tenant, prospect or other business associate and discussing business matters, and that meet happens to occur over a meal, or

• You are away from your tax home where you require substantial rest, and that trip has a business purpose specific to the operation of your rental property.