Write-off purchase of B&B in year purchased?

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04/12/2012

Can I deduct the purchase price (and renovations) of a B&B the year I open? I have other income I want to offset by this business expense. (I cashed in my 401K to buy the property and do repairs.) Thanks!

 

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Kay Nein's picture
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02/13/2012

 Muirford is right - however you do it this year will affect how it is treated in future years.  And some elections you make this first time cannot be reversed or amended.  The land is not depreciable.  And, although you might have income to offset this year,  you might have even more income to offset in another year.  So, trying to write off the whole thing (which is not going to happen) in one year could set yourself up to be screwed in future years.  

The tax law is very complicated.  I am a self-employed bookkeeper )for the last 8 years and in business bookkeeping for the last 16).  I have dealt with the IRS alot.  I can tell you that if you file these taxes yourself and try to deduct something that is not allowed (ie: the whole kit & kaboodle) they will come right back and hit you for it.  You can't claim ignorance of tax law - all the rules are online for viewing (regardless of the fact that they can't be understood by regular folk), there's IRS offices in every state for assistance, there's help lines to call and accountants who are trained to make sure that you follow the rules and don't get in trouble.  If you do this yourself, do it wrong and get caught, you will be hit with HUGE penalties and also late fees for any additional taxes they assess from the time they would have been due.  It's totally not worth it!

Check this out - 

http://www.ustaxcourt.gov/InOpHistoric/Wolfgram.TCM.WPD.pdf

The IRS asserts that any expenses incurred in connection with a bed-and-breakfast activity were capital expenses under section 263(a)(1) or startup expenses under section 195(a) and thus are not currrently deductible.

And like this says - any expenses incurred before the day you actually opened for business are treated separately.  They are considered start-up costs and have to be amortized over time - research costs, design/architect, materials, mileage during this time... .  Those expenses have to be separated out and documented.

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08/23/2011

I can't believe what I just read!!  Had to re-read it several times!

Talk about jumping off a cliff without a parachute.

You didn't consider this before you cashed out your 401?  Madeleine is totally correct about paying taxes on it, although I thought it was more.  But I could be wrong.  Wouldn't be the first time and I know it won't be the last.

I think you are trying to use this as a form of rolling over your 401k.  Purchasing a building never qualifies as a full deduction, it is depreciated over a period of time.

Cashing out a 401k is not the same as Capital Gains from selling a house where you purchase a new property to offset your profit.

I don't give tax advice but that much I do know.  The rest I leave to my accountant.  She does all the depreciation and what not.

If you don't have one, get one real quick.

I will echo......I HOPE THIS IS NOT FOR THIS YEAR!!!!!

By the way taxes are due on Tuesday not Monday but that is not here nor there,

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Colleen848

 

gillumhouse's picture
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05/22/2008

bunkhouse wrote:

Can I deduct the purchase price (and renovations) of a B&B the year I open? I have other income I want to offset by this business expense. (I cashed in my 401K to buy the property and do repairs.) Thanks!

 

 

         

Madeleine's picture
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09/29/2011

Hopefully you are not asking this now for taxes due on Monday! You need a tax attorney and/or a tax accountant to explain the ins and outs of using your 401k in this manner. You need to be set up as a sole proprietor or a corporation and you need to understand how each of those impacts your taxes.

Handing your 401k money over to yourself generally means penalties (10%) and taxes being paid. Handing it over to a corporation that then invests the money in your business is a different scenario.

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muirford's picture
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05/22/2008

 The building will need to be depreciated over 31 (not sure of the number) years and cannot be written off in one year.  The land does not get depreciated, ever (you have to separate the two for tax purposes).  Then repairs and maintenance can usually be deducted completely, but some purchases may also need to be depreciated, like big appliances.  You should really contact a tax attorney to set it up intially so you use the right schedules and basis for depreciation and the expenses.  It's not very straightforward and the decisions you make now will follow you in your taxes for the years you own the business.

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Jeanne

There are no rules, just follow your heart. ~ Robin Williams

 

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