Saturday, December 3, 2011

Are Time Share Expenses Tax Deductible?

The short answer is that it depends. For the long answer, read this post. (I had to provide a sample tax-related post for a potential client. Now, a couple of weeks later, it dawned on me this was just a sample and wasn't going to be published. So I decided to post it here, providing what I hope is helpful information for any of my readers who has a timeshare.)

Timeshare owners may incur many expenses such as interest expense, property taxes and maintenance fees. A common question is whether or not these expenses are tax deductible as some owners equate timeshare ownership with owning real estate. However, the two are quite different and the answer to whether or not the expenses are deductible often depends upon how the timeshare is used.

Any loan used to pay for a timeshare must be structured very carefully to allow the interest to be taken as a tax deduction. For tax deductible interest, the loan must be secured by the property. Not all loans available through developers meet this requirement and, therefore, the interest would not be deductible. In addition, interest may be deducted on only two homes, a primary residence and a vacation home. If you have timeshares at more than one property, no matter how the loan is structured, only the interest on one may be tax deductible.

Unlike the interest expense deduction that limits the number of properties, you may be able to deduct property taxes on any number of units that you own. Methods of assessing and billing property taxes vary by state. In some areas, the timeshare owner is billed directly. In other states, the individual weeks are assessed through the developer and the tax bill shows up on the maintenance bill. In such cases, the tax is probably deductible since it has been assessed directly against the time that you own. However, property taxes that are billed directly to the resort as one large parcel will probably not be deductible.

As with the cost of maintaining your primary residence, fees and assessments are not typically tax deductible, even if they are for a one-time tax assessment, such as public road or sewer improvement throughout the resort.

Where you claim the deductions on your federal tax return depends upon how you use your timeshare. If your use is totally personal, deduction are taken on Form 1040, Schedule A. If the use is totally rental, then Schedule E is used. If the unit is both rented and used for personal use, both forms are used with the expenses proportioned based upon the time used personally and the time used for rental. For instance, if you have a three week timeshare that is rented for one week, two-thirds of the expenses should be entered on Schedule A and one-third on schedule E.

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