Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, May 7, 2006.

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

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

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

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

The judge said no!

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

Internal Revenue Code 280A(a) is very clear there are no personal residence expense deductions and that includes dual business and personal uses, he emphasized.

To qualify for tax deductions, the business-use portion of the taxpayer’s residence must be “exclusively” for business use, the judge continued. Dual-use areas for both personal and business purposes clearly cannot qualify for tax deductions, he ruled. Therefore, the Andersons owe $1,434 additional 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

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