How to Deduct a Loss on a Timeshare Sale

A timeshare property is a vacation home that several people own together and share use of. For example, 50 people might each have a one-week timeshare in a condominium in Hawaii (with two weeks left vacant for maintenance, as is typical). In the United States, people who purchase timeshares usually get legal title to it with their name on the deed, along with other owners of the same unit/share.

You are legally entitled to sell your timeshare at any time, just like for any other real estate. Unfortunately, timeshares are almost always sold at a loss, because:

• their initial price was usually inflated beyond the true value, and
• a limited resale market exists for timeshares, such that many people can't sell at all and try to give their timeshare away.

If you do manage to sell your timeshare, but at a loss, can you at least deduct the loss from your taxes (if you itemize deductions)? Unfortunately, the answer is usually no. Nevertheless, there are exceptions, which depend on how you used your timeshare.

Why Would You Ever Want to Sell Your Timeshare?

As alluring as it can sound to own a timeshare in Hawaii or another resort location, you might discover hidden disadvantages. Cost, for example, can be an ongoing concern. Maintenance and other fees can be substantial and can go up over time. You might get tired of the place (even Hawaii can get boring), and not want to spend your vacation at the same spot each year. Or you might find that, if your contract doesn't entitle you to use the place at a fixed time each year, the competition with fellow owners sometimes leaves you with no vacation choice but an inconvenient time of year or during bad weather.

It's no wonder many timeshare owners eventually decide to sell their interests. (Also see Buying a Timeshare: Pros, Cons, and Form of Ownership.)

Losses on Sale of Personal Use Timeshares Not Deductible

A timeshare is considered a "personal use timeshare" if you used it 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. The great 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.

Losses on Sale of (the Rare) Timeshares Used as Rental Property Are Deductible

If a timeshare qualifies as rental property, losses incurred on its sale are tax deductible. However, this is rarely possible. A timeshare will qualify as a rental property only if:

• it was rented at fair market value to unrelated parties for 15 days or more during the year, and
• its owners did not personally use it 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-day, 14-day, 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 to satisfy the fewer-than-15-days or 10% personal use tests. For this reason, few timeshares can be classified as rental property.

Losses on Sale of Purely Business Timeshares Are Deductible

You can deduct your losses when you sell a timeshare if it qualifies as a business timeshare. There are two ways to achieve this classification:

• you purchased your timeshare to reduce your cost of business lodging and used it only while traveling on business, or
• you purchased the timeshare purely as an investment in the hope of making a profit.

In either case, you must never have used the timeshare for personal purposes or rented it out.

If you used the timeshare as business lodging, you may deduct a loss when you sell it as a business lodging expense. But, if you want your timeshare to qualify as business lodging, you must:

• have had a legitimate business, and
• have engaged in some type of business-related activity whenever you used your timeshare.

For example, if you had a timeshare in Hawaii, you could have attended a business convention or business-related educational seminar there and stayed in your timeshare. You would need to have spent a majority of your days there engaged in a business activity. Be sure to keep careful records.