I am commonly asked how selling a timeshare or renting a vacation condo affects consumers with respect to state and federal income taxes. The first 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 advice specific to your situation.
In this article, I have put together some general information that you should consider when speaking with your legal advisor or accountant. The following information should not be considered legal advice, but rather general topics to discuss when selling or renting a timeshare complex.
Most of the time they are sold on the secondary market they are sold at a loss! It is extremely rare for a timeshare owner to sell for a higher price than they originally paid, even if their timeshare property was purchased as a resale on the secondary market. The first rule of thumb of timeshare ownership is that the monetary value of timeshares decreases over time. Every timeshare owner should expect their vacation property to be worth less in the future than it is now. Try to think of your timeshare as you would other comparable luxury items, such as a car or boat. The main difference between them is that “old” timeshares are not appreciated over the years! Often times, 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 great vacations.
The financial loss from the sale of your timeshare is generally not deductible. United States tax laws 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 property in the same way as 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 an investment in rental property 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 income tax. If you are audited, you will 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 will start with a clean slate. Again, check with your attorney or CPA to make sure you have the most accurate information. Your legal advisor may advise you to 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 as exclusively for business purposes, you will need to calculate the expenses of your purchase and property at the time of a future sale. Combine your purchase price, the escrow or title fees you paid at closing, the brokerage commissions or fees you paid, and any part of the annual fees you paid that went toward replacements or equity reserves. The portion of the maintenance fees paid for operating expenses should not be used unless your attorney instructs you otherwise. The maintenance fee invoice 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 estimates. Your selling expenses should include any advertising fees, brokerage commissions, and any closing costs you paid during the sale of your timeshare.
When calculating your expenses to use as a deduction from rental income, you may be able to use the total amount of annual maintenance fees and taxes you paid in that specific year of use. You will also want to include your advertising receipts and any brokerage fees you have paid.
In closing, remember that your timeshare property may be subject to both state and federal tax requirements. State laws may apply in your own state of residence, as well as in the state where the timeshare complex is physically located.
You want to investigate any closing agent or title company involved with the sale and transfer. Find a respected timeshare closing agent who is experienced with your particular resort and who understands the state and federal reporting requirements related to transferring ownership. Your closing agent should be able to tell you if there are withholding requirements, like federal withholding (FIRPTA) or a state withholding, like (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 ensure that you have done the required due diligence in consultation with your attorney or certified public accountant. Proper advice can save you time and money!