Innkeepers battle IRS over dual-use tax break

Charles and Sandra Anderson bought the Eureka Street Bed andBreakfast Inn in Sutter Creek, Calif. They, and Sandra’s parents, use part ofthe 5,664-square-foot house as their personal residence. Theirbed-and-breakfast guests use the rest of the house.

On their income-tax returns, the Andersons calculated 4,818square feet for business use, resulting in 85 percent business use and 15percent personal use.

Purchase Bob Bruss reports online.

But part of the main floor (lobby, registration area,office, kitchen, and laundry room) is “dual-use” by both thetaxpayers and their guests.

Upon audit, the Internal Revenue Service denied deductionsfor the 606 square feet of dual-use, resulting in $1,434 additional tax for theAndersons. They took their dispute to the U.S. Tax Court.

If you were the U.S. tax court judge would you allow theAndersons to deduct depreciation and other expenses for the personal andbusiness dual-use 606 square feet?

The judge said no!

The 606 square feet of dual-use bed-and-breakfast businessand personal-use space cannot qualify for the depreciation deduction ofInternal Revenue Code 280A(f)(1)(B) for business use, the judge explained.

Internal Revenue Code 280A(a) is very clear there are nopersonal residence expense deductions and that includes dual business andpersonal uses, he emphasized.

To qualify for tax deductions, the business-use portion ofthe taxpayer’s residence must be “exclusively” for business use, thejudge continued. Dual-use areas for both personal and business purposes clearlycannot qualify for tax deductions, he ruled. Therefore, the Andersons owe $1,434additional income tax, the judge ruled.

Based on the 2006 U.S. Tax Court decision in Anderson v.Commissioner, T.C. Memo 2006-33.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2006 Inman News

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