I am frequently asked how selling a timeshare or renting a vacation condo affects consumers when it comes to state and federal income taxes. The first piece of advice I always give is simple but vital. Discuss your plans with your CPA or tax preparer to ensure you have the most accurate information and receive advice specific to your situation.
In this article, I’ve put together some general information you should consider when talking to your legal counsel or accountant. The following information should not be considered as legal advice, but rather as general topics to discuss when selling or renting a timeshare resort.
Most timeshares sold on the secondary market are sold at a loss! It is extremely rare for a timeshare owner to sell for a higher price than he originally paid, even if his timeshare property was purchased as a resale on the secondary market. The first rule of timeshare ownership is that the monetary value of the timeshare decreases over time. Every timeshare owner should expect his vacation ownership to be worth less in the future than it is now. Try to think of his timeshare as you would other comparable luxury items, like a car or boat. The main difference between them is that “old” timeshares don’t appreciate over the years! Often the only real value of a timeshare lies in the use and enjoyment the owner receives, and in the photo albums created from years of fantastic vacations.
The financial loss from the sale of your timeshare is generally not deductible. Tax laws in the United States consider a timeshare to be a specialized form of real estate that is classified in most cases as your personal asset. Your tax preparer should think of your vacation ownership the same way you think of your car. When you sell a vehicle that you have owned for personal use and enjoyment, you cannot claim a financial loss on your income taxes. However, if that same vehicle is owned and used entirely for business purposes, then there may be tax benefits.
If you originally purchased your timeshare for business purposes or as a rental property investment and you can show that you have consistently used it for that purpose, you may be able to claim a financial loss when you file your tax return. If audited, you’ll need to be able to provide evidence to support your deduction, such as advertising receipts and executed rental agreements.
If you originally purchased the timeshare for personal use and later decide to use it for business purposes, you may want to consider transferring ownership to your business or creating an LLC or other legal entity to hold title. This way, you’ll start with a clean slate. Again, check with your attorney or CPA to ensure you have the most accurate information. Your legal counsel may recommend that you obtain an appraisal or comparative market analysis at the time of transfer to determine what the fair market value is for the timeshare.
Once your property can be classified solely for business purposes, you will need to calculate the expenses of your purchase and ownership at the time of a future sale. Combine your purchase price, any escrow or title fees you paid at closing, any commissions or brokerage fees you paid, and any portion of the annual fees you paid that went toward replacements or capital reserves. The part of the maintenance fees that is paid for operating expenses should not be used unless otherwise advised by your advisors. Your maintenance fee bill should provide you with a breakdown of the annual assessment. If not, contact your homeowners association or resort manager to request a copy of the timeshare resort budgets. Your selling expenses should include any advertising fees, brokerage commissions, and closing costs you paid during the sale of your timeshare.
When calculating your expenses to deduct from rental income, you may be able to use the full amount of annual maintenance fees and taxes you paid in that specific year of use. You’ll also want to include your advertising receipts and any brokerage fees you’ve paid.
In closing, remember that your timeshare ownership may be subject to state and federal tax requirements. State laws may apply in your own state of residence, as well as in the state where the timeshare resort is physically located.
You want to research any closing agents or title companies involved in the sale and transfer. Find a respected timeshare closing agent who has experience with your particular resort and understands state and federal reporting requirements related to transfer of ownership. Your closing agent should be able to tell you if there are any withholding requirements, such as federal withholding (FIRPTA) or state withholding such as (HARPTA).
While there are many things to consider when selling or renting your timeshare property, the most important thing you can do is simply take your time and make sure you’ve done the required due diligence by consulting with your attorney or CPA. The right advice can save you time and money!