Do you use your timeshare for personal and business lodging only? If so, celebrate, celebrate! You qualify for maximum tax benefits.
Your business lodging at your timeshare escapes the dreaded restrictions imposed by the vacation-home rules.
Thus, with only business lodging and personal use of your timeshare, you can qualify the timeshare for both business and personal tax benefits. This article shows you how.
Rule One
Rule one for maximum tax benefits from a timeshare is: do not rent it out or offer it for rental.
If you rent your timeshare to others, you complicate your tax-deduction life. You can still get some benefits, as we will discuss in next month’s article on rental of a timeshare, but not as many as are described in this article.
In this article, we deal with only two types of timeshare use:
- Your use of the timeshare for business purposes
- Your use of the timeshare for personal purposes
No Rental Use
With NO RENTAL USE, you AVOID the DREADED vacation-home rules that limit deductions. Further, with no rental use, the tax rules contain one wonderful exception made just for you, which reads:
(4) COORDINATION WITH SECTION 162(a)(2). – Nothing in this section (vacation homes) shall be construed to disallow any deduction allowable under section 162(a)(2) (business travel) (or any deduction which meets the test of section 162(a)(2) but is allowable under another provision of this title) by reason of the taxpayer’s being away from home in the pursuit of a trade or business (other than the trade or business of renting dwelling units).
This means that the IRS may not apply the vacation-home rules to deny business travel deductions. Wow! This makes your tax life easy.
Now all you have to do is meet the rules for deducting your travel expenses as detailed in Section 162(a)(2) of the Internal Revenue Code, which states:
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
- . . .
- traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
- . . .
As the First Circuit Court of Appeals and the Commissioner of the IRS point out:
Congressional floor debates pertaining to the enactment of section 280A(f)(4) indicate that, in appropriate circumstances, expenses incurred in connection with ownership of a home could qualify as deductible business lodging expenses.
Treated Like a Member of Congress
With your timeshare use, you get treated like a member of Congress, who can deduct the business portion of his or her out-of-town lodging expenses while serving in the United States Congress.
Then Senator Dole stated that the purpose of the new Internal Revenue Code Section 280A(f)(4) provision was to “clarify that the personal use rules of section 280A will not be construed to deny otherwise allowable business expenses for travel away from home”.
In Timeshare Words
To put it in “timeshare words,” this means that if you do not rent out your timeshare, you do not consider the adverse impact of the vacation home rules that make co-owner use of the timeshare count as personal use by you. What a nice benefit.
Example. You own 14 days at a timeshare. You use the timeshare for business lodging on 11 days and do not use it for three days. Under the rules, you look only at the days of use. All days of use (the 11 days) are days of business use. Thus, you deduct 100 percent of your timeshare cost as a business expense (i.e., your 14-day ownership).
Example with a twist. With 11 days of business use and three days of personal use, you divide the timeshare into its business and personal parts based on days of use. Again, you can ignore the co-owners because you had zero rental days. You deduct your 11/14ths business part, and you can treat the 3/14ths personal part as a second home, as we explain later.
Let’s focus for a moment on the rental part that complicates your tax life. As you would expect from tax law, what you think is a rental may, in fact, not be a rental. And as you now know, if it’s not a rental, your tax life gets easier.
Renting to Relatives Is Not a Rental
Say you rented your timeshare at fair market rent to your brother for a week. Your brother paid the rent money by check. You accepted and deposited the check in your bank account.
Tax law says the rental of the timeshare to your brother never happened for you. For your taxes, your brother’s rental of the timeshare counts as personal use by you.
The rent charged makes no difference. Thus, both paying and non-paying relatives who use your timeshare create personal use by you. For this purpose, your relatives include your:
- mom and dad,
- brothers and sisters,
- sons and daughters,
- grandchildren and grandparents, and
Charity Use
Donation of your timeshare for charity use produces personal use by you and creates no tax deductions.
No matter how much the charitable donor pays for use of your timeshare, the IRS counts the charitable use as personal use by you.If you donate a week of timeshare use to your church’s annual auction, you have a week of personal use no matter what the successful bidder pays for that week of use.
Swaps
The swap of your timeshare with a friend or under an exchange agreement produces personal use by you.
Strategy
To deduct all of your timeshare cost as a business expense, you must use the timeshare “solely” for business.
Claiming Your Deductions
Now that you know the business-use-of-timeshare rules, you need to first ensure that you have business use of the timeshare. You can do that with business lodging or with employee use, as we will discuss in July.
If you operate your business as a proprietorship or as a single-member LLC (disregarded entity treated as a proprietorship), you simply take your business use expenses for the timeshare and put them on your Schedule C.
This is not the case with a corporation. If you operate your business as a corporation, you likely own the timeshare personally. To get the deduction on the corporate books, have the corporation reimburse you for timeshare operating expenses and depreciation as reimbursed employee business expenses. This avoids rental-use complications and ensures your maximum tax benefits.
To see how this type of operating expense and depreciation reimbursement works, read the article titled
“Reimburse Corporate Owner-Employee for Depreciation.”
Identifying the Deductions
Once you establish your business use, you deduct your expenses. The expense deductions are straightforward, depending on how you own the timeshare.
Timeshares come in two forms: deeded and non-deeded.
- With the deeded form of timeshare, you buy an ownership interest in a piece of real
In the non-deeded form of timeshare, you buy a lease, license, or club membership that lets you use the property for a specific amount of time each year for a stated number of years.
Writing Off Timeshare Ownership
If your interest is in the form of a deed, you write off your ownership as follows:
Allocate the purchase price to land, land improvements, building, and personal property as we describe in Make the Closing Statement Work for You When Buying Rental Property. The principles of allocation in this article apply to buying an office building, a rental property, or a timeshare.
- Write off the building over the course of 39 years (commercial use of business lodging property).
- If you financed the timeshare, write off your interest payments as business
- Deduct your annual maintenance fees as lodging
Writing Off a Timeshare Lease
If your timeshare ownership is in the form of a lease, here are the guidelines:
- Follow the general business rules to identify the rent payments for the current year’s
- If you paid any rent in advance, allocate the advance rent over the life of the
- Allocate the rent paid and amortized to your business.
Example. You lease a timeshare unit for 12 years. You paid $25,000 for the 12-year lease. In addition, you pay an annual maintenance fee of $500. You allocate the $25,000 in equal amounts over the 12 years at the rate of $2,083 a year. In addition, you add the annual maintenance fee of $500 a year for an annual cost of $2,583. If you use the timeshare for business lodging only, your deduction for the year is $2,583.
Business and Personal Use
What happens if you use the unit for both personal and business purposes during a year?
That’s easy. Simply allocate expenses and costs between business and personal uses. Treat the business expenses as described above.
Treat the personal expenses
- as non-deductible if you have no ownership interest, or as a dwelling (second home) if you have an ownership interest
Timeshare as a Dwelling
If you have an ownership interest in the timeshare, you treat the personal part of your timeshare as a “dwelling.” A dwelling includes a house, apartment, condominium, mobile home, boat, and similar property.
To be a dwelling, the timeshare must have basic living accommodations, such as
- sleeping space,
- a toilet, and
- cooking
Home Mortgage Deduction
The interest paid on the personal part of your timeshare mortgage may qualify for a home-mortgage interest deduction under the qualified-second-home-mortgage-interest rules.
Rule 1. If you have no rental use of the timeshare during the year, you may treat the personal use percentage of the interest you pay on the timeshare as deductible mortgage interest.
Caution. The IRS deems as rental use an attempt to rent a timeshare.
Example 1. You own a timeshare. You do not use it during the year, rent it, or put it up for rental. You may designate the timeshare as your second home and deduct the interest on your timeshare mortgage.
Example 2. You own a timeshare and use it for business lodging and personal purposes only. You deduct the business portion of the interest as a business expense. Since you did not try to rent the timeshare property, you may claim the remainder of the interest as second-home interest.
Rule. For purposes of determining qualification for the mortgage interest deduction, the IRS does not consider either personal or rental use by your fellow timeshare co-owners.
Example. You own one week of the timeshare. Fifty-one co-owners own the other 51 weeks. If the other 51 owners rent their units and you do not rent or put your unit up for rental, your unit is a second home. The co-owners do not cause the IRS to consider your unit a rental property for purposes of the mortgage interest deduction.
Getting the Business Result
The golden rule to get the business result is this: do not rent the timeshare or put it up for rental, not even for a single day.
With zero rental, your use of the timeshare falls into either the personal or the business category, and unlike the timeshare rental category, tax law looks favorably on both personal and business use.
Takeaways
Maximize benefits. If you use your timeshare solely for business and personal purposes without renting it out, you avoid the complications and limitations of the vacation-home rules.
Tax codes. Section 280A(f)(4) and Section 162(a)(2) allow the deduction of ordinary and necessary expenses for business, including lodging, when traveling away from home.
Separate personal and business use. You allocate expenses accordingly if you use your timeshare for both business and personal purposes. Business-related expenses are deductible, while personal use portions are treated differently depending on whether the timeshare is deeded or leased.
Timeshare as a second home. On the personal portion of a deeded timeshare, you can classify it as a second home, making timeshare mortgage interest deductible.
Claiming deductions. If you claim your business deductions on Schedule C of your Form 1040, take your business use expenses of the timeshare and put them on Schedule C. If you own the timeshare personally but use it for corporate purposes, have your corporation reimburse you for the business-related portion of the timeshare’s operating expenses and depreciation.
