Tax Breaks on Timeshares
Timeshares, which are arrangements by which you purchase the right to use a unit at a property for a period of time, remain controversial among financial advisors. On one hand, they allow you to lock in vacation property for an extended period of time at a relatively fixed cost. On the other hand, they tend to be illiquid and, when you can sell them, it's frequently at a loss. However, one thing that is undeniable is that they can carry tax advantages.
For you to be able to claim deductions on a timeshare, you need to treat it as your second home. The Internal Revenue Service allows you to apply the home mortgage interest itemized deduction on two homes -- your primary home and a second home that you designate. You can only write off the interest on your first $1 million of acquisition debt and first $100,000 of home equity debt.
Claiming the home mortgage interest deduction on a timeshare is a little bit more complicated than claiming it on a traditional house. The IRS only lets you write off interest that you pay on a loan that takes the property as collateral -- like a traditional mortgage. If you buy your timeshare with a credit card or with a loan that isn't secured by the underlying real estate, it doesn't qualify as a mortgage and your interest won't be tax-deductible.
As long as you are itemizing your deductions, you can write off the property taxes that you pay on all of your homes, including your timeshares. However, you need to be able to clearly establish what the property taxes are on your timeshare. If your timeshare is located in a state that separately assesses taxes on each timeshare owner, your tax bill provides documentation. If, however, you pay your property taxes with your maintenance fee, the bill you receive from the timeshare manager must break out the property taxes for you to be able to write them off.
Normally, the IRS requires you to file Schedule E when you have rental property. On Schedule E, you report all of your income and subtract all of your expenses. In the case of a timeshare, you'd subtract your maintenance fee, any interest that you pay, the cost of renting out your unit and depreciation on the property. If you have a profit, you'll have to pay tax on it. If you have a loss, it's unlikely that you'd be able to deduct it from your income. The IRS won't let you claim passive losses if your adjusted gross income is over $150,000. They also won't let you claim losses on a property that you use personally for more than 10 percent of the time that it's available, a threshold that you'll probably exceed if you use your timeshare at all. There's a completely legal way around these limitations, though. As long as you rent your timeshare out for 15 or fewer days per year, the IRS turns a blind eye to it. You won't be able to write off any rental expenses, but you won't have to report the rental income that you get either. While it's not a tax break if you lose money on the rental, it is if you can rent it out profitably. Either way, the whole transaction is tax-free, as described in the IRS' own Publication 527 on Residential Rental Property rules.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.