The Innkeeper's Resource

Innkeepers and Taxes. Are Yours Done Yet?

Every year on April 16 many of breathe a sign of relief that our tax returns are finally filed and (gulp) we've stroked a check to Uncle Sam for what has hopefully been a profitable year. Procrastinators file extensions but still have to pay up. Many innkeepers, especially those with smaller properties, are often pleased that they don't, in fact, have to write a check to the government, because, on paper, they didn't make any (or not enough) money. It's the magic of cost recovery, which is what we call depreciation these days.

Depreciation is a wonderful thing for real estate investors and people who own business equipment. It saves money in the short term. And, if a bed & breakfast has been successful and had a profitable year, the depreciation helps soften the blow at tax time. But there's a danger in obsessing too much about paying (or avoiding) taxes.

Many innkeepers run their business as if avoiding taxes was their reason for existing. You run your food through the business, your car payments, your vacations, your club memberships, and maybe you don't bother to allocate the portion of utilities and property taxes that are not exclusively for business use. And your bottom line looks terrible. Yay! No taxes this year! But guess what? There's a price to be paid when it's time to sell.

Buyers of bed & breakfast businesses, if they are looking for a business and not a hobby and tax shelter (which B&Bs are great for) are scrutinizing financials very closely. Banks are looking even more closely. It isn't going to sell the inn to tell someone that you really do make money if only your personal expenses weren't all run through the business and showing as deductions on your tax return. If you're selling an inn business, and there's value in the business, you must show as healthy a bottom line, net operating income, as possible. This is what creates value, and it's what a buyer can take to a bank.

So, if you plan to sell your bed & breakfast inn in the next 3-5 years, now is the time to clean up your books, take only your allowable deductions, and show as much profit as you actually can. Depreciation will still soften the hit, but look at it this way: If you have to pay taxes, it's only because you actually made money. Yay! (That's a real cheer this time!).

Peter

2008 Inns and Bed & Breakfasts For Sale Study

For the fourth year Inngenium, LLC, Lodging Management Consultants has completed a fascinating study of the marketplace of inns and bed & breakfasts for sale nationally. The only study of its kind, it looks at the availability of properties for sale that are actually current or former inns (excluding those marketed as "potential" B&Bs). The study's author, Hilary Jones, looks at each state individually, then aggregates by region and nationally. The result is "a snapshot of the inn and B&B real estate market."

To put this year's report into context, the residential real estate boom of the first five years of the millennium are over; the real estate and mortgage markets are in turmoil; prices in many areas of the country have plunged, and inventories are at all time highs. Therefore, it is very illustrative to note that the B&B market has tracked that trend similarly.

Nationally, inventory of inns for sale is up 26.3% over 2007. Average asking prices have also tracked residential trends with prices generally showing a decline, the exception being at the very high end. In the 5-10 room category, prices have declined 7.3% to $1.1M in the past year, while prices are down 8.7% to $1.7M in the 12-15 room category. There were also some individual records set in this study, with the lowest price nationally being in Texas ($160,000) for a bank-owned B&B, the most expensive bed & breakfast (no restaurant) at $8.5M in Florida, and the highest price inn of any kind recorded (a full service property in Pennsylvania) for $10.5M. The price range with the highest percentage of inns for sale was $750K - $1M, with 22.4% of the properties falling into that category.

Of particular note, twice as many inns as last year (43.6%) have been on the market more than a year, and 24.2% have found their way into the study for the past two years. This confirms what professionals in the industry have long said that marketing periods of 2-3 years for an inn are not unusual.

The B&B Team, Inc. was please to be the sole corporate sponsor of the 2008 Inns and Bed & Breakfasts For Sale Study. For a copy of the report, please contact us.