IRS laws governing commom areas

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DeeDee

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My husband and I are looking at a property to purchase for a B&B...........a perfect property. We would plan on living in the home but I will not if the IRS prevents me from having an occasional family function in this beautiful Victorian home. Can anyone shed some light on IRS deductions and common areas?
Thanks,
DeeDee
 

EmptyNest

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You need to talk to an accountant. You will NOT be able to deduct the entire cost of the home. Only a percentage of the rooms STRICTLY used for business purposes only. Of course people cheat on this...but if you are willing to take the chance of an audit. You can NEVER deduct the entire expense of a property unless it truly is ONLY entirely for guests and most B & B's are not.
 

egoodell

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Cat lady is correct from what I have understood. I have been told a common ploy during audit is the auditor will comment, "What a beautiful property. I bet your family comes to visit often".
Wrong response is to agree. Correct response is to note, "Oh when family comes to town they stay in the hotel down the street as we keep our rooms for paying guests only".
I have been told if you note that your family has used a room then it is not deductible for one year.
RIki
 

JBloggs

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The thing is, is it a B&B or a homestay? That is something to decide. Sharing guest areas or ocassionally using them for your own purpose, after all you live there too! That is up to the individual B&B owner and the tax man. We can all say what we want, but I will be the first to say I drive over the speed limit. The law says 45mph and I drive 50mph.
 

egoodell

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The thing is, is it a B&B or a homestay? That is something to decide. Sharing guest areas or ocassionally using them for your own purpose, after all you live there too! That is up to the individual B&B owner and the tax man. We can all say what we want, but I will be the first to say I drive over the speed limit. The law says 45mph and I drive 50mph..
Joey Bloggs said:
The thing is, is it a B&B or a homestay? That is something to decide. Sharing guest areas or ocassionally using them for your own purpose, after all you live there too! That is up to the individual B&B owner and the tax man. We can all say what we want, but I will be the first to say I drive over the speed limit. The law says 45mph and I drive 50mph.
Absolutely. The trick is not to get caught. To answer questions properly when / if you get audited.
RIki
 

Joey Camb

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This has always seemed really harsh to me I can let rooms in my place for free to family whenever I like. Think it is a case of being very carefull. Also did you mean to use communal areas for family visiting or bedrooms as well?
 

JBloggs

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The main thing to remember is that when you have a home business you are scrutinized much more closely than just owning your own business, then if you LIVE IN THE BUSINESS double that.
 

Tom

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Another approach is to actually charge family and friends as guests. Sounds crass, but not so when you consider how much it costs you to keep the place and the wear and tear. We charge $25 - $40 sgl/dbl for up to a few days and run it as regular income, albeit with a big discount. It covers our cost for cleaning and breakfast supplies and lets f&f enjoy being pampered without feeling they are taking advantage. Indeed, it has been a relief for friends to have an arrangement, either becasue they themselves are not in a position to reciprocate due to location/facilities or due to the rather mundane fact that as innkeepers, we can't just up and go off for a weekend to someone's house. Some family was not so enthusiastic (is the term inveterate freeloader a synonym for BIL?), but when told they could clean their own room to B&B standards or pay the maid to do it, well, they did the math.
The inn is a business. Suppose you were an orthodontist, hairdresser, auto mechanic, plastic surgon - any other business. Would you treat f&f even below your cost of service? It is possible to be a generous host/ess and have an upfront understanding of what it takes you to keep the pillows fluffed.
 

DeeDee

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my husband and I intend to abide by the law which is our whole dilemma. We're not interested in finding creative ways to cheat the system but since we're new to the B&B concept we wanted to be sure there wasn't a legitimate way to have a business and enjoy this beautiful property as our home at the same time. Tom's response was actually more of the kind of advice we were looking for. My husband went as far as to say if we have the family over for a summer picnic in the yard we would write a check from our personal account to the business account for property rental like we would for a wedding or birthday party. ........ not even sure if we can incorp. those kind of things into the business.
To me it would not be worth having the business if I can't have my grandkids over for fear they would run into the business area of the house to use the bathroom which by the strictest sense would not allow me to claim that bathroom and the path he/she took to get there for that whole year!
egoodell, what is a homestay? how does it differ from a B&B?
 

DeeDee

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Can someone tell me more about the outside property? Say friends or family come by to visit in our common area, park out back and walk up the sidewalk through the back yard to enter our common area. Am I now not allowed to claim the area of the sidewalk? the entire back yard? Where is the line drawn?
 

egoodell

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my husband and I intend to abide by the law which is our whole dilemma. We're not interested in finding creative ways to cheat the system but since we're new to the B&B concept we wanted to be sure there wasn't a legitimate way to have a business and enjoy this beautiful property as our home at the same time. Tom's response was actually more of the kind of advice we were looking for. My husband went as far as to say if we have the family over for a summer picnic in the yard we would write a check from our personal account to the business account for property rental like we would for a wedding or birthday party. ........ not even sure if we can incorp. those kind of things into the business.
To me it would not be worth having the business if I can't have my grandkids over for fear they would run into the business area of the house to use the bathroom which by the strictest sense would not allow me to claim that bathroom and the path he/she took to get there for that whole year!
egoodell, what is a homestay? how does it differ from a B&B?.
DeeDee said:
my husband and I intend to abide by the law which is our whole dilemma. We're not interested in finding creative ways to cheat the system but since we're new to the B&B concept we wanted to be sure there wasn't a legitimate way to have a business and enjoy this beautiful property as our home at the same time. Tom's response was actually more of the kind of advice we were looking for. My husband went as far as to say if we have the family over for a summer picnic in the yard we would write a check from our personal account to the business account for property rental like we would for a wedding or birthday party. ........ not even sure if we can incorp. those kind of things into the business.
To me it would not be worth having the business if I can't have my grandkids over for fear they would run into the business area of the house to use the bathroom which by the strictest sense would not allow me to claim that bathroom and the path he/she took to get there for that whole year!
egoodell, what is a homestay? how does it differ from a B&B?
I think the point of the IRS is that your family can stay anytime in your home - which is the innkeeper's quarters. So you would need a guest room in your quarters which would not be a room that is rented to the public and part of the business.
RIki
 

egoodell

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my husband and I intend to abide by the law which is our whole dilemma. We're not interested in finding creative ways to cheat the system but since we're new to the B&B concept we wanted to be sure there wasn't a legitimate way to have a business and enjoy this beautiful property as our home at the same time. Tom's response was actually more of the kind of advice we were looking for. My husband went as far as to say if we have the family over for a summer picnic in the yard we would write a check from our personal account to the business account for property rental like we would for a wedding or birthday party. ........ not even sure if we can incorp. those kind of things into the business.
To me it would not be worth having the business if I can't have my grandkids over for fear they would run into the business area of the house to use the bathroom which by the strictest sense would not allow me to claim that bathroom and the path he/she took to get there for that whole year!
egoodell, what is a homestay? how does it differ from a B&B?.
DeeDee said:
my husband and I intend to abide by the law which is our whole dilemma. We're not interested in finding creative ways to cheat the system but since we're new to the B&B concept we wanted to be sure there wasn't a legitimate way to have a business and enjoy this beautiful property as our home at the same time. Tom's response was actually more of the kind of advice we were looking for. My husband went as far as to say if we have the family over for a summer picnic in the yard we would write a check from our personal account to the business account for property rental like we would for a wedding or birthday party. ........ not even sure if we can incorp. those kind of things into the business.
To me it would not be worth having the business if I can't have my grandkids over for fear they would run into the business area of the house to use the bathroom which by the strictest sense would not allow me to claim that bathroom and the path he/she took to get there for that whole year!
egoodell, what is a homestay? how does it differ from a B&B?
I think the point of the IRS is that your family can stay anytime in your home - which is the innkeeper's quarters. So you would need a guest room in your quarters which would not be a room that is rented to the public and part of the business.
RIki
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A homestay is when a guest books a room in your home. Someone wants to rent Suzie's room while she is away at college. You will have to check and see what the regulations are for your county or city. We cannot advise you as the regs are different in different areas. And I don't know the IRS regs for a homestay as I have never owned one
 

Alibi Ike

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Can someone tell me more about the outside property? Say friends or family come by to visit in our common area, park out back and walk up the sidewalk through the back yard to enter our common area. Am I now not allowed to claim the area of the sidewalk? the entire back yard? Where is the line drawn?.
I think there are probably certain types of properties where outdoor space would be considered 'off limits' to use by family & friends (this does include you, BTW). However, for family to come and visit you at the B&B and to use the outside spaces that you are not claiming to be part of the B&B is ok.
Example of this...if you have a pool and you allow guests to use that pool, promote that pool on your website, insure that pool against guest claims, have the pool guy paid for by the biz, etc and then claim that pool and all its expenses as part of your biz, then, yes, it's part of your biz and off limits to the family.
The yard? No, it don't think so but I'm not a lawyer an accountant or an IRS auditor.
So, the whole situation with the house comes down to this...do you have personal space that is NOT part of the business? Personal space that you pay all the expenses for? ie- you pay for the electricity, the heat, the hot water, etc out of your own pocket? Space where guests are not allowed? If you don't have anything other than say a bedroom and a bathroom, you really need to go over this with an accountant because you can't even make dinner for yourself in the kitchen if you claim that space is part of the inn.
Essentially, YOU are going to be drawing the line. THIS is mine and I pay for everything that gets used in it out of my own money that has been taxed by the IRS and THAT is the B&B where everything is paid for by the business and is a legitimate expense on my tax return.
That's your space, you do with it what you want. If the business is paying for the space- all the expenses of that space are deducted from your taxes- then that is business space and if your family wants to come and stay there, they have to pay. Or else it is NOT business space, it is personal space. (This is the big red flag the IRS has with home offices...does only business take place in there or do all the guys come over and watch the game on Sunday in front of the big screen TV (that the business bought and paid for)? Do your kids do their homework in there because that's where the computer is, do they use the biz computer that you just wrote off?)
All the IRS really cares about is that you are not writing off legitimate, taxable income as a business expense tax and then using that same 'income' for your own personal use. (Don't drink the juice or eat the leftovers, either, if the expense of buying those items was charged to the business.)
But, you also have to use common sense. Is your yard going to regularly be 'rented' by guests? If not, then it's just your yard. If your grandkids run into the inn and use a guest bathroom rather than peeing on the carpet in the front hallway, it's hard to picture the IRS claiming you are not keeping your biz and personal life separate. However, if those same grandkids SLEEP in those guest rooms and you feed them food the B&B bought, then yes, the IRS has a right to expect you won't be claiming those things as business expenses or write-offs.
So, charge them. Explain it and charge family a modest fee. (And why big hotels can comp rooms to the owners and their friends and family we still haven't figured out.)
And get an accountant who can explain the difference between being a sole proprietor and being a corporation and where the line is blurry and where it is very clear. We have a couple of corporations. We pay our own utilities and we have renters insurance for our personal space because we are 'tenants' and the B&B insurance only covers the building and the inn's property, not our junk. Essentially, we rent our apartment from the corporation that owns the property.
 

Alibi Ike

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Can someone tell me more about the outside property? Say friends or family come by to visit in our common area, park out back and walk up the sidewalk through the back yard to enter our common area. Am I now not allowed to claim the area of the sidewalk? the entire back yard? Where is the line drawn?.
I think there are probably certain types of properties where outdoor space would be considered 'off limits' to use by family & friends (this does include you, BTW). However, for family to come and visit you at the B&B and to use the outside spaces that you are not claiming to be part of the B&B is ok.
Example of this...if you have a pool and you allow guests to use that pool, promote that pool on your website, insure that pool against guest claims, have the pool guy paid for by the biz, etc and then claim that pool and all its expenses as part of your biz, then, yes, it's part of your biz and off limits to the family.
The yard? No, it don't think so but I'm not a lawyer an accountant or an IRS auditor.
So, the whole situation with the house comes down to this...do you have personal space that is NOT part of the business? Personal space that you pay all the expenses for? ie- you pay for the electricity, the heat, the hot water, etc out of your own pocket? Space where guests are not allowed? If you don't have anything other than say a bedroom and a bathroom, you really need to go over this with an accountant because you can't even make dinner for yourself in the kitchen if you claim that space is part of the inn.
Essentially, YOU are going to be drawing the line. THIS is mine and I pay for everything that gets used in it out of my own money that has been taxed by the IRS and THAT is the B&B where everything is paid for by the business and is a legitimate expense on my tax return.
That's your space, you do with it what you want. If the business is paying for the space- all the expenses of that space are deducted from your taxes- then that is business space and if your family wants to come and stay there, they have to pay. Or else it is NOT business space, it is personal space. (This is the big red flag the IRS has with home offices...does only business take place in there or do all the guys come over and watch the game on Sunday in front of the big screen TV (that the business bought and paid for)? Do your kids do their homework in there because that's where the computer is, do they use the biz computer that you just wrote off?)
All the IRS really cares about is that you are not writing off legitimate, taxable income as a business expense tax and then using that same 'income' for your own personal use. (Don't drink the juice or eat the leftovers, either, if the expense of buying those items was charged to the business.)
But, you also have to use common sense. Is your yard going to regularly be 'rented' by guests? If not, then it's just your yard. If your grandkids run into the inn and use a guest bathroom rather than peeing on the carpet in the front hallway, it's hard to picture the IRS claiming you are not keeping your biz and personal life separate. However, if those same grandkids SLEEP in those guest rooms and you feed them food the B&B bought, then yes, the IRS has a right to expect you won't be claiming those things as business expenses or write-offs.
So, charge them. Explain it and charge family a modest fee. (And why big hotels can comp rooms to the owners and their friends and family we still haven't figured out.)
And get an accountant who can explain the difference between being a sole proprietor and being a corporation and where the line is blurry and where it is very clear. We have a couple of corporations. We pay our own utilities and we have renters insurance for our personal space because we are 'tenants' and the B&B insurance only covers the building and the inn's property, not our junk. Essentially, we rent our apartment from the corporation that owns the property.
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And, yes, every time my parents stay here they pay me to have a guest room so they can get away from the noise. My kids stay in the spare room. The grandkids sleep on the floor in the office. We eat our meals in my dining room with food we bought ourselves and cooked in our own kitchen.
 

Generic

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Wow... US taxes are complicated. We are required by law in Quebec to live in the B&B, so it is essentially our private residence. We don't have tax deductability of mortgage payments in Canada. But our private residence is shielded from capital gains. I can't even imagine what I would do if I had to pay myself to use my own kitchen to make dinner.
 

EmptyNest

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Wow... US taxes are complicated. We are required by law in Quebec to live in the B&B, so it is essentially our private residence. We don't have tax deductability of mortgage payments in Canada. But our private residence is shielded from capital gains. I can't even imagine what I would do if I had to pay myself to use my own kitchen to make dinner..
Laws are different in every town besides having to follow the IRS rules. You don't have to pay yourself for use of the kitchen, you just can't deduct 100% of it's use for the business. Our accountant took a % use of the business. The only rooms we got 100% deduction was guest areas becasue we truly only used them for our guests.
We had our own separate part of the house for our living quarters with bedroom, bathroom,den, and dining room and we also used the basement only for us. We did not however use renter's insurance for our property. Ours was just lumped in with everything.
 

Copperhead

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Our property is also divided on a use % basis. DeeDee, it is very important to meet with an accountant or tax attorney to have them go over the different tax laws depending on how you set up your businss and how you 'live' in your home/business.
Your property - outdoor areas from what I remember are really not taxed as business unless you deduct improvements you have made which may include lounge chairs, gazabo, patio etc. and even the addition of plants.... But again, go over these things with the ones that are really in the know about the details!
 
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