Timeshares and Tax Deductions
By David H. McClintock, CPA
For TimeSharing Today
The second in a series of four articles that address various timeshare-related tax issues.
Which of the various expenses associated with timeshare ownership are deductible on your U.S. income tax return? Interest expense? Property taxes? Maintenance fees? Special assessments? Other items? Sometimes the answer is, "It depends."
This article will focus on the answers to those and related questions. Whether such expenses can be deducted in connection with the rental or business use of a timeshare will be discussed in another article.
Interest paid on a loan to buy a timeshare week is often deductible. The tax law allows deductions for most interest expense that an individual pays on a primary home and one other home, such as a timeshare or other vacation home.
If you have loans on more than two eligible homes, you may choose which two homes (one of which must be your primary home) you will treat as qualifying for interest deduction purposes. You may change your choice of qualifying properties from year to year.
Example: If you have a primary home, a vacation home, and a timeshare week, you may deduct interest expense related to your primary home. In addition, you may deduct interest expense on only one of the other two properties. Even if you do not incur interest expense for your primary home, you are still limited to deducting interest expense on only one of the other two properties.
If you finance the purchase of timeshare weeks at different resorts, only the interest expense on one of those purchases will be deductible. However, if you own multiple weeks at one resort and have financed their purchase, we believe there is a reasonable position to take that the multiple weeks at that one resort constitute a single home for those rules. If the weeks are fixed rather than floating, we believe a stronger case would exist if the weeks owned are contiguous.
Secured Loan Requirement
For the interest expense to be deductible, the loan must be secured by the financed property. Thus, if you charge part or all of the purchase to a credit card, the credit card interest would not be deductible, since the credit card debt is not secured by the timeshare week. Similarly, the interest on many loans provided by timeshare developers would not be deductible, as they are often not secured by the deeded weeks.
Example: If you borrow $8,000 to finance a timeshare purchase, the loan documents must clearly show the deeded timeshare week as security for the loan, just as the mortgage documents on your primary home loan do. Otherwise the interest is not deductible.
How can you ensure that the interest will be deductible?
- One way is to use a home equity loan on your primary residence to finance the acquisition.
- Another way is to refinance the mortgage on your primary home for a higher loan amount, especially if interest rates are as low as or lower than on your current mortgage. Use the additional proceeds to pay cash for your timeshare week.
- A third way is to ask the seller to make the loan in a form that shows the timeshare week as security.
If you have a timeshare week on a long-term lease (a Right-to-Use or "RTU"timeshare), the interest on a loan secured by that week will normally not be deductible. To be entitled to a tax deduction for interest expense in connection with such a purchase, you should finance it with a mortgage or home equity loan on your primary home.
Your interest expense deduction may be limited based on the amount of debt on the two properties. Generally, for interest to be fully deductible, total debt cannot exceed $1,000,000 of mortgage (property acquisition/improvement) debt and $100,000 of home-equity type debt. There are some further limitations if total debt exceeds the fair market value of the properties.
The manner in which property tax is assessed and billed by local taxing authorities varies from state to state. Thus, some jurisdictions (such as in California) bill timeshare owners directly. In other cases (such as in Florida), the weeks are assessed individually and the tax is normally identified separately on your timeshare maintenance fee billings. In either case, the tax should be deductible, because the property tax has likely been assessed against your individually owned week.
However, if the property taxes are neither directly billed to you nor separately stated on your maintenance fee billing, you may not be entitled to a deduction for the tax. In such a case, it is likely that the entire timeshare resort has been assessed and billed for property tax purposes as one tax parcel or as parcels bigger than just your individually owned week. The tax in such a case is not assessed against your individual ownership, thus negating the opportunity for a tax deduction.
There is no limit to the number of properties for which you may deduct property taxes. Thus, if you own ten timeshare weeks, and six of them have property taxes billed or stated separately, you should be able to deduct the taxes on all six timeshare weeks.
Your annual fees are for the purpose of maintaining and improving the timeshare resort, just as you spend money for maintaining and improving your primary home. Such fees are not deductible.
Normally, special assessments by your timeshare association are not deductible. They almost always represent special fees for improvements, major repairs or unexpected expenses. Usually, the assessments are for something other than taxes paid to a state or local government. Even if the assessment is for a one-time local tax, such as to finance a new sewer system in the neighborhood of the resort, such payments are not deductible.
Closing costs on your timeshare purchase are generally not deductible. Those expenditures, along with any related legal expenses and other costs incurred to purchase your week, should be added to the purchase price to determine the total cost of your week for tax purposes. (More about that in a future article.)
Any apportioned property tax on your purchase (or selling) closing statement should be deductible. Similarly, interest expense shown on the statement should be deductible, if it meets the requirements for interest expense as stated above.
Exchange fees, membership fees or dues paid to exchange companies and expenditures paid in connection with your annual occupancy are treated as personal expenditures. Thus, they are not deductible.
Normally, interest expense and/or property taxes will be the only deductible expenses in connection with your timeshare ownership. A loan must be carefully structured for you to be entitled to that interest deduction. Property taxes may be deductible for timeshares if the property tax is separately billed or separately shown on the maintenance fee billing.
This article does not cover all possible circumstances associated with timeshare-related expenses. Further, the tax results suggested herein may not be applicable in all circumstances (for example, if you take a standard deduction rather than itemizing deductions). So always consult your tax advisor before deciding how to treat an item discussed in this article.
For the interest expense to be deductible, the loan must be secured by the financed property.
Normally, special assessments by your timeshare association are not deductible.