Until a few years ago, timeshares had a bad name.
Most of this was because of the public’s limited
understanding of the real facts and issues involved
in ownership. However, with respected operators like
Hilton, Marriott, and Disney now in the business,
most of the industry's image problems have
disappeared. As a result, timeshare ownership is
again on the upswing.
These days a week at a new property will almost
certainly cost over $12,000, and a prime week at a
ritzy location like Beaver Creek, Colorado, can run
$30,000 and up. How does this impact my income
taxes? The answer depends on whether you rent
your unit for at least part of your allotted time.
Let’s address these issues one at a time…
When the Unit Isn't Rented
If you use a timeshare rather than rent it out
(which, after all, is presumably why you bought it
in the first place), the property taxes that are
generally buried in your annual maintenance fees are
deductible as long as you itemize your deductions.
In addition, if you borrowed money to acquire the
unit, the interest expense you pay is normally
deductible. And that's about as far as the tax
deductions go. The other items buried in the
maintenance fee such as utilities and association
membership charges are nondeductible personal
expenses.
When the Unit Is Rented
If you rent your unit for at least part of the time
you're allotted, things become more complicated. All
of your rental income normally is reported as
taxable income but generally only part of your
expenses are deductible. The tax law expects you to
determine the deductible portion of the expenses
based on usage of the unit by all of the owners and
renters during the year. However, because it's
typically impossible to get the necessary
information from the other owners, most timeshare
owners presumably base their calculations on how the
unit was used during just their time period.
For example, if you own two weeks in a unit, lease
it for one, and take your family there during the
second week, 50% of your expenses (for property
taxes, interest expense, maintenance fees, etc.)
should be deductible up to the amount of your rental
income. Although the other 50% of the property taxes
can be claimed as an itemized deduction, your
remaining expenses are generally nondeductible
personal expenses. The remainder of the interest
expense, however, could be deductible if you used
the unit for personal purposes for the greater of 14
days or 10% of the days it was rented during your
time period or if the unit qualifies as investment
property. (An IRS auditor would likely challenge the
investment property argument by claiming you
acquired the unit primarily for personal rather than
investment purposes.)
As you can probably tell by now, a timeshare's tax
benefits are nothing to get too excited about.
However, that doesn't mean acquiring a unit is a bad
idea as long as you're happy with the purchase from
a personal standpoint. The lack of significant tax
benefits simply means nothing if your intent is to
do what we all like to do on vacation… have fun!
Selling your Timeshare
Any profit on the sale of your timeshare is taxable.
If you sell at a loss, the loss is normally not
deductible. Profit on sale is treated as capital
gain, subject to favorable tax rates if owned for
more than one year. For gain purposes, your cost is
generally your original cost, plus additions for the
following items: (1) closing costs incurred when you
purchased your timeshare, (2) the portion of your
annual maintenance fee (for all years owned)
allocated to capital reserves or used specifically
for capital improvements (such as a new roof), and
(3) any special assessments for capital improvement
purposes which you paid. This amount should be
reduced by any depreciation expense in years you
rented the timeshare.
If you (and/or relatives or friends) use the
timeshare, exchange it, or let it go unused, a loss
on sale will be personal and not deductible, just as
a loss on the sale of your home or your car would
not be deductible. Even though your intent might be
to hold it as an investment, your personal use
results in no tax loss being allowed upon sale. If
you regularly rent the timeshare to others, a loss
on sale might be an allowable business loss. If you
have an allowable business loss on sale of your
timeshare, it is deductible as an ordinary
(non-capital) loss.
If you expect to sell at a loss, should you
convert the timeshare to rental property to ensure
deductibility of the loss?
It isn’t that simple. If you convert property
from personal to rental/business/ use, the basis
(i.e., cost as determined for tax purposes) for
determining gain is what you paid, as described
above, just as if you hadn’t converted to rental
use. However, the basis for determining loss is the
lower of cost or fair market value on the date of
conversion to rental use. Fair market value is to be
determined based on the value in your market (i.e.,
the resale market), not the price you paid to the
developer.
In addition, the IRS might disallow the loss if you
sell the timeshare before renting it for several
consecutive years, since isolated transactions (such
as renting a timeshare unit for one week) generally
do not convert a personal investment into a business
investment for IRS purposes. Also, no loss on sale
would be allowed if you convert it back to personal
use before selling.
