How to Deduct a Loss On a Timeshare Sale
Tax issues when you sell a timeshare property
A timeshare property is a vacation home that several people own together and share the use of. For example, 50 people may each have a one-week timeshare in a condominium in Hawaii (two weeks are ordinarily left vacant for maintenance). In the United States, people who purchase timeshares usually get legal title to their timeshare with their name on the deed along with the other owners of the timeshare unit.
Buying a timeshare in Hawaii or another resort location can seem like a great idea at first, but can end up being not so great. Maintenance and other fees can be substantial and can go up over time. The family may get tired of the timeshare property (even Hawaii can get boring), and not want to spend their vacation at the same place each year.
Many timeshare owners want to sell their interests, which they are legally entitled to do at any time, just like for any other real estate. Unfortunately, timeshares are almost always sold at a loss because (1) they are usually sold initially at inflated prices, and (2) there is a limited resale market for timeshares. Indeed, many people can't sell their timeshares at all and try to give them away.
If you do manage to sell your timeshare at a loss, can you at least deduct the loss from your taxes? Unfortunately, the answer is usually no, but there are exceptions. It all depends on how you use your timeshare.
Personal Use Timeshares
A timeshare is a personal use timeshare if you use it almost exclusively as a vacation getaway for yourself and your family, relatives, and friends, or you left it vacant or exchanged its use with other timeshare owners. Personal use timeshares can be rented to strangers, but for no more than 14 days per year. The majority of timeshares fall into this category. Losses from the sale of a personal use timeshare are deemed to be personal losses and are not deductible at all. End of story.
Rental Only Timeshares
A timeshare will qualify as a rental only timeshare if (1) it is rented at fair market value to unrelated parties for 15 days or more during the year, and (2) the owners do not personally use the timeshare for more than 14 days per year or 10% of the total days rented, whichever is greater.
When determining the rental and personal use days for the 15, 14, and 10% cutoffs, you must include the combined use of all the owners of the timeshare unit. The result is that personal use by any owner of a timeshare is considered personal use by all of the owners—for example, if you use your timeshare zero days, but the other owners use it 300 days, you have 300 days of personal use. This makes it virtually impossible for you to satisfy the fewer-than-15-days or 10% personal use tests. For this reason, few timeshares that are rented are classified as rental only timeshares.
If a timeshare does qualify as rental only, losses incurred on its sale are deductible.
Mixed Use Timeshares
A timeshare is a mixed use timeshare if (1) it is rented at fair market value to unrelated parties for 15 days or more during the year, and (2) the owners personally use the timeshare for more than 14 days per year or 10% of the total days rented, whichever is greater. Because the personal uses of all the timeshare owners are combined for these calculations, most timeshares that are rented are classified as mixed use timeshares.
When you sell a mixed use timeshare you must treat the sale as a sale of two separate assets for tax purposes: a personal use timeshare and a rental timeshare. You allocate the sales price and tax basis between the two assets in proportion to your rental vs. personal use. You can deduct any losses you incur from sale of the rental use portion of the timeshare.
Example: Sam paid $10,000 for a one-week timeshare in Hawaii that he used personally one-third of the time and rented out the rest of the time. He sells the timeshare for $4,000. He allocates $2,000 of his $6,000 loss to his personal use and $4,000 to his rental use. The $4,000 is a deductible rental property loss. The $2,000 is a nondeductible personal loss.
By the way, the tax law prevents you from converting a personal use timeshare to a mixed use or rental only timeshare before you sell it so you can deduct your losses. When you make such a conversion, the property's basis (cost for tax purposes) becomes the lesser of (1) the property's adjusted basis or (2) the property's fair market value at the date of conversion. If, as is usually the case, your timeshare has declined in value, you'll have to use the fair market value at conversion as the adjusted basis. Thus, when you sell, you won't have any deductible losses.
Example: You buy a timeshare from a developer for $10,000. When you convert it to rental use its resale value is only $4,000. You must use $4,000 as your basis for determining any loss when you sell it. You sell the property for $4,000 and realize no loss or gain.