Timeshare Donations
 


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Timeshare Ownership / Donation Tax Benefits

Donate Timeshare = Current Market Value Tax Deduction

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.

Timeshare Donation Tax Benefits cont..

 

      Timeshare Donation Income Tax Benefits

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