| Tax Time
with an Overseas B&B |
| by Ron
Winkles |
| My wife
and I started our B&B in the Czech Republic about four years ago.
Since then, we have learned a lot of lessons, and we have had a great time.
From an Internal Revenue Service perspective, I can say we have benefited
from our investment in the Czech Republic. Our investment involved buying
an old 5000 square foot villa built in 1864 and restoring and renovating
it into a Bed & Breakfast.
We report all
our income from our B&B business both in the USA and the CZ. We do
this to avoid any problems, and so far, it has cost us nothing in taxes.
In fact, we have saved on our USA taxes by reporting our B&B income. |
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| In the
CZ, all associated business expenses plus repairs and improvements are
directly deductible from your income derived from the B&B.
Since the B&B is our only source of taxable income in the CZ, we have
paid no income taxes there in the last six years.
In the USA,
it is essentially the same thing, except I ended up with a $5000 rental
loss on my Schedule E.This helped to greatly reduce my taxes. This $5000
rental loss resulted from income being less than expenditures.
The question is, "Are we really losing money?"
We invested
in the villa for three reasons. First, we wanted a place of our own
in the Czech Republic. The villa was centrally located to every
place we wanted to regularly visit in the "New Europe." Second, we wanted
to invest in this beautiful little country with a big future. This
included the hope to reap a significant capital gain by way of property
appreciation. Third and last, we wanted to try our hands at operating
a B&B and to share our great find and enjoyment with friends, relatives,
guests, and those of a similar mind set -- other escape artists like ourselves. |
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| Have we made
a killing from our $75,000 B&B investment which includes the purchase,
furnishing and renovation costs for the B&B? The answer is,
no, but our return on investment has run about 5 to 8 percent annually,
and we have had a great time making a little more than stateside CD rates
while earning a nice tax write off.
As far as capital
gains, we have no interest in selling. I did turn down double
our investment two years ago from one of our guests. It has been
six years, and we are still having too much fun! To tell the truth, our
kids may never have an interest in owning the villa if we leave it to them,
but that is their problem. The whole experience has made us great
friends in our little town, and we have gained the admiration and respect
of our village, family, and guests. We have also learned a new language
and an entire new way of life and culture from the Czech People. |
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Offshore
Resources Gallery
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| Now!
Let us get back to the IRS. The Schedule E will be your key to success.
Here you report your rents received and your expenses. Starting at the
top of the form, we list the kind and location of the property (e.g. rental,
7 bedroom stone house, 5000 sq. ft., Hredle, CZ 27008). We follow
this on line 3 with rents received for the year. Your itemized expenses
follow and these you need to track closely and mind your B&B's operational
status. It makes a difference if you are renting rooms while renovating
or just renting rooms.
With an on-going
renovation, your entire travel expenses for the most part are tax deductible
(e.g. food, travel, laundry etc.) because you are working and spending
money to produce money. Hence, if you enjoy working like this,
you have a tax deductible "Working Vacation."
If your B&B
is
fully operational and not in need of renovation or repair, only your travel
directly connected with managing the B&B is deductible. Also, you have
to report living in a portion of it if you stay there more than two weeks.
Only those meals consumed away from the B&B connected to business are
then deductible. |
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careful about your B&B's operational status.
My wife and
I travel once or twice to Europe each year to oversee operations.
This is a $1500 to $3000 itemized expense for us. Our total rental
car expense and fuel can be deducted and this amounts to hundreds of dollars.
We often travel to Germany, Hungary, and Poland to "coordinate" with
other B&B owners, and we buy antiques to furnish the villa.
All other
associated operating expenses for the B&B should be reported like advertising,
cleaning, maintenance, utilities, and management fees.
We use a
Czech family to manage our B&B. They are a young couple, and they
enjoy living in the villa instead of a cramped, noisy apartment in the
city. The husband works nearby in the village, and his wife stays at
home. |
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| We provide
them a nice two bedroom apartment and a garden lot as well as 25 percent
of the B&B income. In turn, they run the B&B, pay for the villa's
utilities and phone service and maintain the grounds. We pay for
the repairs, property taxes, and insurance. This is why it helps to buy
a place large enough to accommodate onsite management. We also
have a two bedroom apartment in the villa. This leaves us a one bedroom
and a two bedroom apartment to rent.
There are only
two other sticky areas on the Schedule E form. These are items
14 and 20 which are Repairs and Depreciation, respectively. You want
to be careful with these because of what may happen later when you sell
and are subject to capital gains.
In Czech, both
repairs and improvements to the B&B are deductible from your B&B
derived income and capital gains when you sell. In the USA, repairs
may only be deducted from your rental income, and improvements are only
deducted from our capital gains. So, watch carefully what you
deduct because you will have a lot of both repair and improvements
in a start-up B&B operation.
As far as depreciation,
I do not claim it. There is no law that says you must. I
do not recommend it unless you really need the deduction now and you do
not plan on selling the property. Otherwise, if you claim depreciation,
you only spread the gap between depreciated value and the actual sales
price which results in more taxable capital gains.
To sum up,
our investment has given us a get-away retreat with all utilities paid,
and our travel expenses are tax deductible. This, plus an additional
tax deduction of $5000 on our USA tax statement, essentially provides us
with free round-trip airfare to Europe.
Our approach
may work for some and not for others. My wife and I are not greedy
people. We just like to be comfortable and to enjoy our early
retirement and travel while we have good health. We both retired
at 45 after 20 years in the military. It has been ten years now,
and we are still doing fine without working for someone else. We planned
our retirement from the start, and part of the planning included not paying
a lot of tax. Consequently, we invested in real estate and rental
property. Now, it is taking care of us.
We have no
debts. Most of our bills are to pay for insurance on cars, houses,
and health and our utilities. The bank pays all our bills automatically
except for income tax. I have to come home to do taxes every year.
For disturbing my retirement, I make sure the IRS only gets a small amount
of what we make. We usually keep 90 percent or more of what we pay
in income taxes.
I was audited
once by the IRS to see what we were doing with our B&B in the
Czech Republic. The IRS agent was curious to see if it was on the
level or just a paper tiger. I produced the bills, business license,
deeds, photos and everything else to show our investment was real. The
IRS agent could not believe a retired couple earning $55,000 a year could
afford to live in America and own a villa in Europe. Jokingly, I
told him we saved money by not shopping in Wal-Mart.
I invited the
IRS agent to be our guest at Villa Favorite. He was very interested,
but he declined fearing a possible conflict of interest since our rates
were so low. I told him he could stay for $15 a night without
breakfast. If he wanted breakfast, it would be $3 more. He
asked, "What do you get for breakfast: strong, black coffee and a hard
roll like they give you in most of Europe?"
I told him,
"You
get eggs to order, fresh rolls and pastries from the bakery, fresh smoked
meat and cheese garnished with sliced pickles and tomatoes, assorted, home-made
jellies with real butter, cereal, fresh fruit, yogurt, and all the strong,
black coffee you care to drink unless you want to put the real cream in
it."
He responded
by saying, "Now, I know this is a conflict of of interest! Take this stuff
and get out of here!" We both laughed as we parted company!
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