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Owning and Renting Timeshares
Editor:
Editor’s note: This case study has been adapted from “Tax Planning for High Income Individuals,” 3d edition, by Anthony J. DeChellis, Douglas L. Weinbrenner, Catherine A. Roeder and Patrick L. Young, published by Practitioners Publishing Company, Fort Worth, Tex., 2002 ((800) 323-8724; www.ppcnet.com ).
Facts: Willie Walters owns weeks 25 and 26 in unit #110 at the Mountain Chalet Timeshare Resort. Last year, he rented out week 25 and used week 26 for a family vacation. • Willie’s timeshare weeks cost $22,000, partly financed by a $15,000 mortgage loan arranged through the developer. Willie’s interest expense is $1,750; his annual maintenance fee is $800 ($300 of which is for property taxes). He incurs $125 in advertising expense to rent week 25 for $1,050. • Willie finds from his conversations with other owners that apparently, units are rented approximately half the year and used by the owners for the other half. Issue: How does Willie report the income and expenses from his timeshares?
Analysis Like other dwelling units, the tax treatment of timeshares depends on how owners use the property. However, the rules are complicated; timeshare ownership often limits the owner to only one or two weeks a year. Guidance is lacking on the proper tax treatment of timeshare rental income and expenses. The Code and regulations have to be analyzed in view of the owner's use of the unit to determine how he or she should report the income and expenses on a return.
Unit Not Rented If a taxpayer uses a timeshare unit and it is not rented out (or held out for rent), he or she could deduct property taxes on Schedule A, under Sec. 164(a)(1). Because such taxes may be buried in the annual "maintenance fee," the management company should be contacted if the amount is not broken out. Other components of the maintenance fee (e.g., utilities and association membership charges) are non-deductible personal expenses. Mortgage interest on an unrented timeshare unit is fully deductible on Schedule A, according to Sec. 163(h)(4)(A)(iii), provided the Sec. 163(h)(3) requirements are met.
Unit Rented A timeshare owner who rents a unit for some or all of his or her allotted time is generally subject to the Sec. 280A vacation home rules, which limit deductions and require expense allocations. The Sec. 280A(d)(1) 14-day/10% test is applied to the unit as a whole, counting the personal days of all the unit's owners during the year. Thus, personal use will almost always be sufficiently substantial to cause all of a unit's owners to be subjected to the Sec. 280A vacation home rules. Prop. Regs. Sec. 1.280A-3(f)(5) appears to require timeshare owners to allocate expenses between personal and rental uses based on all the units' owners' use during the year (i.e., the personal and rental percentages will be the same for all owners). This information can be difficult to obtain; thus, it seems reasonable to base this allocation on the taxpayer's actual personal and rental use percentages. Using appropriate (or available) allocation percentages, the timeshare owner compares his or her rental income to allocable rental expenses (including allocable interest and property taxes) and deducts those expenses up to the amount of rental income on Schedule E, according to Prop. Regs. Sec. 1.280A-3(f)(6). The personal portion of property taxes could be deducted on Schedule A. The personal portion of any mortgage interest expense can be deducted as qualified residence interest only if the individual owner's personal use exceeds the greater of 14 days or 10% of the rental days. According to Temp. Regs. Sec. 1.163-10T(p)(6) and (p)(3)(iii), only the individual owner's rental days are considered for this specific purpose.
Conclusion Willie should report $1,050 of rental income and can deduct up to $1,050 of allocable rental expenses (using a 50% allocation percentage) on Schedule E. Allocable rental expenses before depreciation total $1,400 ($875 of mortgage interest, $150 of property taxes, $250 of maintenance fees and $125 of advertising expense), so Willie can completely offset his rental income with allocable expenses. Allocable expenses in excess of rental income can be carried forward to the next year. Willie can deduct the remaining $150 of property taxes on Schedule A. The remaining $875 of mortgage interest cannot be deducted as qualified residence interest, because the unit is not used as Willie's residence (i.e., his personal use does not exceed the greater of 14 days or 10% of his rental days). |
