Tax Aspects of Selling Your Timeshare

By David H. McClintock, CPA. For TimeSharing Today

The fourth in a series of four articles that address various timeshare-related tax issues.

You have just sold that unwanted timeshare and now it's time to get your tax information ready for your income tax return. Is a gain on the sale taxable? Is a loss deductible? How is the gain or loss computed? Do you need to report the sale on your tax return even if there is no taxable gain or deductible loss? Read on…

Gains - Taxable

The gain on the sale of a timeshare is taxable for federal income tax purposes. The gain should generally be reported on Schedule D.

Losses - Usually Nondeductible

The tax law generally treats a timeshare that you own as a personal asset, much like your personal automobile. Thus, when you incur a loss on the sale, that loss is not deductible. However, if you have regularly rented out your week to others, you might be able to take the position that the timeshare was business or investment property, with the loss being deductible. Renting your week occasionally, converting it to rental property in the year before sale or using it for away-from-home business during each year's vacation would likely not constitute enough business or investment use to justify such treatment.

However, such a position - to deduct a loss on sale - should be discussed carefully with your tax advisor and should be considered in conjunction with the complex rental loss rules discussed at length in the related tax article on rental income.

Calculation of Gain or Loss

Your gain or loss is the difference between your tax cost and your selling price, net of any selling expenses.

Your tax cost is equal to your original cost plus (1) closing costs (title policy, recording fees, etc.) paid upon purchase, (2) the part of your annual maintenance fees apportioned to capital reserves and (3) any special assessments for capital needs which you paid. Special assessments for operating needs should not be included in your tax cost. To determine the portion of your annual fees that were apportioned to capital reserves each year, you might have to contact the homeowners' association ("HOA") if resort financial statement and budget information hasn't been sent to you annually or if you haven't retained it.

Selling expenses include sales commission, advertising, listing fees, recording fees and other expenses incurred for the purpose of selling your week.

Example:Assume that you purchased a week for $7,000, your purchase closing costs were $500, you sold the week for $8,500, and various selling expenses were $1,300. In addition, a review of the annual budget information you received from the resort indicates that the HOA apportioned $650 of your total maintenance fees to capital reserves during the four years you owned the week.

The cost would be $8,150 ($7,000 + $500 + $650). The net loss on sale would be $950 ($8,500 - $8,150 - $1,300). As explained above, generally, that loss would not be deductible.

One additional note on calculating cost for loss purposes. If you converted your timeshare from personal use to rental or other business use, the tax cost for loss-on-sale purposes is equal to the fair market value of the timeshare (usually what you could sell it for) at the date of such conversion. This likely lower "cost" may well reduce significantly or completely eliminate any taxable loss that you might otherwise expect.

Reporting the Sale

In most timeshare sale situations, you will receive a Form 1099, reporting the gross proceeds of the sale. The gross sales proceeds are usually equal to your selling price before reduction for any sales commission and other closing expenses. The sale must be reported on your tax return even if you do not receive a Form 1099. How should the sale be reported?

If you have a taxable gain, report the gain on your income tax return, being careful to show the same number on Schedule D that appears on the Form 1099. If you have a loss on your sale, you should still show the sale on your return, even though the loss is likely not deductible. My preferred treatment is to show the gross proceeds on Schedule D as reflected on Form 1099 and offset the proceeds with an amount that brings the net gain/loss to zero.

Why report the proceeds, if the loss is not deductible? A copy of the Form 1099 goes to the IRS for matching against your tax return. If the IRS can.t match the number on that form to the same number somewhere on your tax return, your return may get selected for audit. Even if you don't receive a Form 1099, the IRS may receive information regarding the sale that it will seek to match to your return.

Summary

Although most timeshares are sold at a loss, if you sell yours for a profit, that gain is taxable. Losses on sales are usually nondeductible.

This article does not cover all possible circumstances associated with sales of timeshares. Further, the tax results suggested herein may not be applicable in all circumstances. So always consult your tax advisor before deciding how to treat an item discussed in this article.