I am commonly asked how selling a timeshare or renting a vacation condo impacts consumers in regards to both state and federal income taxes. The first advice I always provide 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 have put together some general information you should consider when you speak 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 that are sold on the secondary market at sold at a loss! It is extremely rare for a timeshare owner to sell for a higher price than what they originally paid, even if their timeshare ownership was purchased as a resale on the secondary market. The first rule of timeshare ownership is that timeshares decline in monetary value over time. Every timeshare owner should expect their vacation ownership to be worth less in the future than it is now. Try to think about your timeshare as you would other comparable luxury items such as a car or a boat. The major difference between them being that "antique" timeshares do not appreciate over the years! Often, the only true value of a timeshare lies in the usage 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 usually 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 in much the same way as your automobile. 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 can be tax benefits.
If you originally purchased your timeshare for business purposes or as a rental property investment and can you prove 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 audited, you will need to be able to provide proof to support your deduction such as advertising receipts and executed rental contracts.
If you originally purchased the timeshare for personal usage and decide later to use it for business purposes, you may want to consider transferring ownership to your business or create a LLC or other legal entity to hold title. This way you will start with a clean slate. Again- consult with your attorney or CPA to ensure you have the most accurate information. Your legal counsel 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 ownership can be classified as 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 brokerage commissions or fees you paid, and any portion of the annual fees you have paid that were earmarked for replacements or for capital reserves. The portion of maintenance fees paid toward operating expenses should not be used unless your counsel advises you differently. Your maintenance fee bill should provide you with a breakdown of the annual assessment. If it does not, contact your home owners association or resort manager to ask for a copy of the budgets for the timeshare resort. 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 be used as a deduction from rental proceeds, you may be able to use the full amount of annual maintenance fees and taxes you paid in that specific usage year. You will also want to include your advertising receipts and any brokerage fees you paid.
In closing, remember that your timeshare ownership may be subject to both state and federal tax requirements. State laws may apply in your own state of residence as well as the state where the timeshare resort is physically located.
You want to research 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 any state and federal reporting requirements involved with the transfer of ownership. Your closing agent should be able to tell you if there are any withholding requirements such as the federal withholding (FIRPTA) or a state withholding such as (HARPTA).
While there are many aspects to consider when selling or renting your timeshare property, the most important thing you can do is simply to take your time and ensure you have performed your required due diligence by consulting with your attorney or certified public accountant. Proper advice can save you both time and money!
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