Tax Treatment of Timeshare Units

Over the last few years, timeshare units have grown in popularity. These days a week at a new property will almost certainly cost over $15,000 and a prime week at a ritzy location like Kapolei, Oahu, Hawaii, can run $36,000 and up (although, resales of existing properties can often be bought for a fraction of the original cost).
In case you’re thinking of joining the timeshare crowd, we want to alert you to one question that inevitably comes up among new owners: How does this impact my income taxes? Because the answer depends on whether you rent your unit for at least part of your allotted time, we’ll address each situation separately.

When the Unit Isn’t Rented

If you use a timeshare rather than rent it out (which, after all, is presumably why you bought it in the first place), the property taxes that are generally buried in your annual maintenance fees are deductible as long as you itemize your deductions. Mortgage interest is also deductible if you itemize deductions and you choose to make the timeshare your second residence (you can only claim an interest deduction for one second residence). That’s about as far as the tax deductions go. The other items buried in the maintenance fee such as utilities and association membership charges are nondeductible personal expenses.

When the Unit Is Rented

If you rent your unit for at least part of the time you’re allotted, things become more complicated. All of your rental income normally is reported as taxable income but generally only part of your expenses are deductible. The tax law expects you to determine the deductible portion of the expenses based on usage of the unit by all of the owners and renters during the year. However, because it’s typically impossible to get the necessary information from the other owners, most timeshare owners presumably base their calculations on how the unit was used during just their time period. For example, if you own two weeks in a unit, leased it for one, and took your family there during the second week, 50% of your expenses (for property taxes, interest expense, maintenance fees, etc.) should be deductible up to the amount of your rental income.
Although the other 50% of the property taxes can be claimed as an itemized deduction, your remaining expenses are generally nondeductible personal expenses. The remainder of the interest expense, however, could be deductible if you used the unit for personal purposes for the greater of 14 days or 10% of the days it was rented during your time period.

As you can probably tell from the discussion in this letter, a timeshare’s tax benefits are nothing to get too excited about.

However, that doesn’t mean acquiring a unit is a bad idea as long as you’re happy with the purchase from a personal standpoint. The lack of significant tax benefits simply means Uncle Sam isn’t going to bail you out if you make a poor decision on which unit to buy.
If you have any questions or would like to go over the issues we’ve discussed, please feel free to call us.