Tax Benefits of a Bed & Breakfast

With the COVID-19 pandemic making staying in large hotels potentially more dangerous, the bed and breakfast is becoming an appealing option for travelers. After long lockdowns, people are itching to take vacations and investing in a B&B might be a better bet now than in many years past. Reviewing the income and tax benefits of owning a bed and breakfast will help you decide if this investment choice is right for you.

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Run Three Scenarios

Before you spend too much time looking at investment costs, try to calculate what your potential revenue and bed and breakfast operating expenses might be. B&B occupancy rates average about ​50 percent​ throughout the year, according to LittleHotelier.com. If you know what your nightly rental rates will be and what your marketplace rental cost should be, you can quickly get an idea of your profit.

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Next, you'll need to look at your operating costs each year (housekeeping, marketing, foods, utilities, property taxes, insurance). After that, you'll need to factor in paying off your investment.

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If you invest ​$100,000​ and want to pay that off in five years, you'll add ​$20,000​ per year to your operating expenses to determine how much income you'll need each year to meet your break-even cost. You might find that you can make a small profit right away, then eliminate that ​$20,000​ annual investment paydown after year five and add that to your annual profits.

If it's going to take you several years before you show a profit, you can take the tax write-off on your losses. Run three financial scenarios that show conservative, realistic and optimistic income and expense scenarios to see what would happen with each to help you determine if you can afford each potential outcome.

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Read More:Deducting Mortgage Interest on a Second Home

Look for Properties

Once you know what your potential financial situation might be, start looking for properties. Based on your income and expense projections, you'll know how much you can afford to pay for your property. You might be able to pay more for a property that will bring you higher rental rates, or one that has three rooms instead of just one or two. Work with a real estate agent so that you determine all of your purchasing costs, including the property price, commissions, fees, taxes and any upgrades that will need to be made.

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Don't forget that you might be able to convert a basement, above-garage apartment or other on-site building into a rental unit and operate it as an Airbnb-type income generator, if your zoning laws allow. You'll only get tax benefits if your expenses apply to running the business. You won't be able to write off any shared space, such as a kitchen you use to prepare your personal meals and meals for your guests, points out Deductions.Tax.

Read More:Schedule A: Instructions on How to Itemize Deductions

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Look at Tax Breaks

Operating a business brings you a wide variety of tax breaks. If you plan on operating the B&B primarily for the tax breaks, the IRS won't classify your B&B as a legitimate business. For example, if you rarely book rooms, let family and friends stay at the property for free and write off your car, home office and trips to the B&B as "business travel," the IRS won't let you take a deduction. You'll need to make a good faith effort to make a profit.

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Work with a tax professional who not only has small-business expertise, but also real estate experience as well to determine realistic tax deductions for bed and breakfasts. You'll want to get the maximum number of deductions, including depreciation on the property and its furnishings and appliances.

In addition to tax benefits related directly to your B&B, you can generate other tax deductions that come with running a company, points out Frictionless.com. Depending on how you set up your business, you might be able to write off health insurance, retirement plan, home office, vehicle mileage and payroll taxes.

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Read More:Depreciation of Business Assets: Definition, Calculation & How it Affects Your Taxes

Overseas B&B Opportunities

You might have heard of the so-called $1 property sales that began in Italy in 2019 and have since spread to other countries. Towns with declining populations began offering abandoned properties to investors who agreed to spend a minimum amount to renovate the properties and then either live in them or run them as a business (such as a B&B) for a set number of years before selling them.

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You'll need to run the numbers to see what your flights to a country (to inspect properties), permits, local contractor costs and competition might be. You should also learn how much of your profits you can take out of the country each year if that's one of your goals. Don't forget to factor in local and U.S. income taxes.

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