Turn Your Timeshare into a Tax Benefit
Many timeshare interests permit the owner to use vacation properties for a designated period each year in exchange for a purchase cost and an annual fee. So if the personal use of the timeshare is no longer providing a benefit and the cost of utilities, repairs, maintenance and taxes are adding up each year, it may be the right time to consider how the timeshare can help to reduce your taxes.
In a nutshell, the tax treatment is straightforward if you own a timeshare entirely for your personal use. Only qualifying mortgage interest (as a second qualified residence) and property taxes are deductible as itemized deductions for personal-use timeshare interests. Even a charitable donation of the one-year usage of the timeshare is nondeductible for tax purposes since the “right-to-use” contribution does not qualify as either cash or property, which is the requirement for a deductible charitable contribution. If you decide to sell the timeshare, then personal property losses would not be deductible and gains would be taxable gains.
One option which may create a tax benefit is to rent the timeshare to an unrelated party. A timeshare owner may rent out units for a few days each year and help offset the costs. If the property is rented for less than 15 days per year, then no rental income is reported and related expenses are not reported (i.e., the offset creates no reportable rent income).
If the property is rented for 15 days or more per year, then more complex tax rules apply. Since the timeshare is a vacation property, there may be a mixed-use allocation of costs if the property is used for personal use for more than the greater of a) 14 days per year or b) 10 percent of the total days rented. In this case, the owners are required to allocate expenses between personal and rental use and are prevented from deducting rental losses. If the property is not used for personal use, then the rental loss may be limited by passive loss rules until the timeshare is later sold and the gain or loss on the sale is reported. The rental loss is deductible on the sale of the timeshare if it is not a personal-use property.
Another option is to claim a charitable deduction by donating the full timeshare interest. By donating it to a qualified charity, the deduction is equal to the fair market value unless there is any potential ordinary income (i.e., depreciation recapture) from a timeshare sale. The deduction would be reduced by an offset of the potential amount of ordinary income. Any charitable donation in excess of $5,000 may require a written appraisal of the value.
If you are no longer able to benefit from the personal investment in a timeshare interest, you should consider if the tax benefits of a rental activity or charitable donation may help to reduce the ongoing costs of keeping and maintaining it as a personal use asset.
If you have questions about turning your timeshare into a tax benefit, contact Tom Kosinski at [email protected] or call him at 312.670.7444.