posted 11-18-2004 19:35               

Action: We took one of points resort and spacebanked it with RCI. Our pro-rated cost for that one week we spacebanked was $300. This includes the RCI exchange fee and our cost of yearly maintenance. We added the cost of a Guest Certificate. Then we donated it to a charity. The charity auctioned the spacebanked week for $500. The buyer wanted a week that has a listed value of $1400 per week per their website. We were successful in getting a week for the buyer.

Question: How much can we claim in our business expense? Can we: 1. Claim only our hard cost of $300 plus $50 Guest Certificate? or 2. The market value of the week we eventually got for the buyer, i.e. $1400? or 3. Other options TUGgers might have.

(FYI I did a search of the archives and found nothing. Don't know why but nothing Dave M wrote about this showed up. I used keywords: IRS, donation, charitable, charity)

posted 11-18-2004 21:45               

But, in general, my recollection of the situation is that donating the USE of a timeshare week to charity is not a deductible expense.

I would suspect that you will not be able to deduct the market value of the week you obtained with your $300 "investment" no matter how you slice it.

Just my opinion!!!

posted 11-19-2004 00:19               

quote:

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Originally posted by TTom:
in general . . . donating the USE of a timeshare week to charity is not a deductible expense.

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posted 11-19-2004 04:01               

The IRS codes pertaining to the expensing of costs of timeshares as business expenses were probably written when one bought timeshares for personal use only. At an average price of $15,000 for a timeshare, how could one operate the timeshare rental profitably? Nowadays you can buy 15 timeshares for the same $15,000 and have a reasonable chance of renting out the weeks for profitability. This I've managed to do. It wasn't easy but doable. We give away weeks to our valued clients also to maximize our timeshare portfolio. This in turn generates business for us.

The answer that resolves my dilemma best, but not absolutely, is when Karen's accountant indicated that I can treat the "fair market" value of an ownership contribution as the value for IRS purposes. This doesn't answer directly the "use" of a week from a portfolio of timeshare weeks. I would suspect it would be the same. ??

Do I hear any nays?

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"Stop me before I buy again!"

posted 11-19-2004 06:06               

Can you deduct a rental loss?
First, it's certainly legitimate to deduct rental expenses to offset rental income. However, with timeshare rentals, there are some limitations to deducting those expenses if you incur a loss.

Assuming that like most timeshare owners, you typically rent to tenants for one week or less at a time, your rentals don't qualify as a "rental" business. A special section of the Income Tax Regulations prohibits treating your loss as a “rental loss” if the average rental period for a particular tenant is seven days or less.

Even most tax advisors are not aware of this rule. Your tax advisor can review §1.469-1T(e)(3)(ii)(A) of the Temporary Income Tax Regulations. This regulation is also referred to in IRS Letter Ruling #9505002, which gives an indication of the IRS position on this issue as it relates to timeshares, as discussed above.

So what happens to the loss if it's not treated as a rental loss? It falls into the passive activity loss rules of §469 of the Internal Revenue Code. Those rules prohibit deducting such losses except against other passive activity income. Such income is narrowly defined and doesn't include, for example, dividends, interest or other investment income.

Thus, you're pretty much stuck with carrying over such losses to use against positive taxable income from your rental activities in future years. You can also deduct any carryover losses related to a rental property in the year you sell that property.

There are a number of complex rules that could change the result here - including the vacation home rules, rules relating to renting to tenants for longer than one week at a time, etc.

Charitable Donation
As Tom and Karen accurately stated, no deduction is allowed in connection with a donation of the use of any of your timeshares. That means no deduction for depreciation, no deduction for maintenance fees, no deduction for exchange fees or guest certificates or anything else.

§170(f)(3) of the Internal Revenue Code and §1.170A-7 of the Income Tax Regulations prohibit any deduction in connection with the donation of property or the use of that property to charity unless the entire ownership of the property is donated. There is an example in the regulations and another (Example #2) in the first column on page 7 of the IRS Publication Charitable Contributions which are directly on point.

Further, let's assume you try to claim that your donation should be a business expense, not a donation. Unfortunately, when you make a charitable donation, doing so almost always takes it out of the realm of a business expense. Even major business corporations must follow the specific tax rules related to charitable donations to sustain a deduction for such expenses.

Just about the only way that you could sustain such a deduction as a business expense rather than a charitable donation would be if you had a close business connection to the specific charity and had a business purpose for making the donation to that charity. That's difficult to sustain under the very narrow tax rules that apply to this area.

Want more?
There is a much shortened version of the above discussion of restrictions on donations in the TUG Advice article on Timeshares and Taxes.

posted 11-19-2004 21:30               

In this post I'll discuss the rental profits and losses. Since Dave's argument against attempting to deduct timeshare rental losses is supported by IRS codes (I haven't found the time to read them specifically again), what about timeshare rental profits? If take only one week and rent it out and make profits above my maintenance fees and taxes, then I have a profit. From what limited understanding I have of this type of income, I believe I don't have to report this income.

Now, if I take a bunch of weeks and make a bit more net profit from the combined weeks, then we can possibly see a nice part-time income. An individual week rented out may not register on the radar, but ten weeks, or even forty weeks can make a nice part-time income. Do I have to report the combined profit or do I take a position that I do not have to report any one week's profit so a combined forty weeks of profits don't have to be reported either?

Vacation homes are single units with a single tax bill and monthly utilities. When the IRS considered the rental of vacation homes I think they created certain codes that stipulated whether or not you rented one week out and used the rest, or more weeks out and used the balance. I believe the codes showed something like the fewer the weeks rented out the less you needed to report the income.

Herein I've managed to conceptually create a vacation home of forty weeks (or maybe more if I added another 12 more timeshares to create 52 weeks of ownership in this "timeshare home"). I can use some of my weeks personally, or I can rent them out. This actuality was never conceived of by the IRS as being a possible outcome of multiple timeshare ownerships. With the prices of timeshares nowadays on the resale market, I can create a conceptual vacation home of 52 weeks by spending $1000 to buy 52 weeks of timeshares throughout the country. The maintenance fees will be outrageous but this can be done. (Let's see ... at an average cost of $600 for maintenance etc., that's $$31,200 in yearly fees).

We're at an edge of an IRS ruling on this. I just know it. The perversity of this new scenario has been created by the onset of internet technology. I can easily assemble a conceptual vacation home by acquiring 52 weeks. We do this all the time in the stock market. We do IPO's and then when prices drop the company buys stocks back at greatly reduced prices and "re-assembles" the company back together again.

Years ago when the IRS and Congress created the IRA accounts, I asked a simple question that the IRS did not think about. The IRA accounts permitted contibutions of $1000 into IRA's (my memory is fuzzy on this and I stand corrected). The money earned tax free. I asked the question of deliberately ovefunding the account at the beginning of the year and then taking out the overfunding before the end of the tax year. Was there any code or rules to prevent this from happening? Back then, no IRS code provided or specifically denied this situation. What was the overfunding all about? Well, if I started the year with the allowed $1000, and then plunked in $100,000 for the rest of the year, I would have $101,000 earning returns tax free. One day before the tax year ended I would withdraw the $100,000, or the overfunding (the IRS now has a term for this with it's related penalties) so that at the end of the year I would still have $1000 original contribution plus the return earned on $100,000. I researched this extensively. The IRS experts had no answer back then. Of course, I didn't try to test this apparent oversight. Now, the IRS terms this type of shenanigan "overfunding" and have penalties in store for such deliberate violations.

I'll read the charitable tax deductions tomorrow.

posted 11-20-2004 09:37               

You are arguing that you are running a business of renting timeshares for a profit but then fall back on the vacation home rules to justify the above statement. You are picking and choosing which code sections you want to use to net the outcome you want. Unfortunately the internal revenue code doesn't work that way! The passive loss rules have an entire section on interaction with other code sections so that individuals or businesses can not foil the intent of these rules.

In my opinion....if you are using some of the timeshares for personal use.....your audit will not even get into the passive loss rules - you will lose under the hobby loss rules.

posted 11-20-2004 14:10               

The vacation home rules applyonly if you use the "vacation home" for at least 15 days each year for personal purposes. A timeshare can qualify as a vacation home. However, unless you own at least four weeks at a single resort, using at least three of the weeks for personal purposes, you can't take the benefit of excluding the income from renting the fourth week.

posted 11-20-2004 19:00               

Maintenance fee? Housekeeping fee? Advertising fees? ebay fees? Interest on a loan? Rental contract fee? Phone calls? Postage?

posted 11-20-2004 20:36               

quote:

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Originally posted by BocaBum99:
I am quite confused by all of this tax accounting. So, if I own 10 weeks and rent 1 week for $1000. What expenses can I deduct from that $1000 so that I can report it properly?

Maintenance fee? Housekeeping fee? Advertising fees? ebay fees? Interest on a loan? Rental contract fee? Phone calls? Postage?

What if it is a 2br lock out and I rent only the studio section?

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It's actually very simple.

1. Case 1. You rent the unit for more than what you paid in annual fees and taxes.

   Report the excess of rental over annual fees and taxes as income.

2. Case 2. You rent the unit for less than what you paid in annual fees and taxes.

   Do not report anything. Neither the ezpenses nor the loss are deductible.

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Steve Nelson
My Seattle Mariners blog
**
I'd rather have a bottle in front of me than a frontal lobotomy.

posted 11-20-2004 22:15               

quote:

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Originally posted by Dave M:
You can also offset losses from some rentals against profits on others to minimize your net taxable income, but deducting a net loss is still subject to the rules above.

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Suppose I own two timeshares. Each has an annual fee of $500. I stay at one and rent the second one for $1000. Do I have $500 of rental income to report, or do I have no rental income, because my total rental income (on all timeshares) equals my total fees (on all timeshares)?

quote:

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Originally posted by Dave M:
The vacation home rules apply[b]only if you use the "vacation home" for at least 15 days each year for personal purposes. A timeshare can qualify as a vacation home. However, unless you own at least four weeks at a single resort, using at least three of the weeks for personal purposes, you can't take the benefit of excluding the income from renting the fourth week.
[/B]

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This could have interesting possibilities. Imagine *having* to go to go on vacation for tax purposes!

posted 11-20-2004 23:57               

Using only your numbers, you have $500 to report. Your $1,000 of income is offset by the $500 of fees on that week. The other week's expenses are personal, since you used that week.

However, on the first week, you'll also be able to deduct depreciation, reducing your taxable income. You might also have advertising or other expenses, including interest expense on a timeshare loan that might otherwise be nondeductible.

posted 11-21-2004 02:37               

Any idea how much depreciation one can count? I assume that with a RTU, the smallest reasonable estimate of depreciation would be the purchase cost divided by the number of years remaining. However, I can think of reasons for a faster rate of depreciation.

To count a timeshare as a vacation home under the 15 day rule, does one have to stay in the same unit the whole time?

Also, (and this is directed to everyone, not just Dave) I thought of a question relevant to this thread, but not about taxes. Do II and RCI rules forbid donating the use of a deposited week or an exchange to charity, as was described by the original poster? For example, suppose someone has a week that they received from RCI, and can't use it. Can they let someone have the week in exchange for, say, a $500 donation to their favorite charity? (Under this scenario, I'm not sure anyone is entitled to a tax deduction for the $500.)

posted 11-21-2004 22:41               

As for depreciation, you would be amortizing your lease cost with a RTU rather than claiming depreciation. However, the lease cost for amortization purposes is not what you paid the developer, unless you have used it as a rental continuously from the first year you bought it. The cost for amortization purposes is its actual cost or its resale value (whichever is less) in the year you convert it to a rental. That amount is amortized over the life of the RTU, with deductions only in rental years.

posted 11-22-2004 01:44               

I realize that one actually have to stay at one's timeshare for 15 days for it to fall under the 15 dayrule. What I was wondering was, suppose you have a floating week/unit. Is it OK if you are in, say, Unit 201A for the first 7 nights, and then Unit 307B a few months later for the next 8 nights?

posted 11-22-2004 06:53               

If we would donate one of our timeshares to Charity, ie deed. What could we deduct from taxes? What we paid for it, the fair market value, or something else? Also, if we had to pay the maintenance and taxes in the year we donated it, would that be deductable, also?

posted 11-22-2004 07:11               

Note also that if you claim a deduction of more than $5,000 for donations of one or more timeshares in a single year, you must obtain a formal appraisal which complies with IRS guidelines.

No other deduction is allowed. Thus, the MF expenditures, since they are your personal expenditures, don't add to the deduction.

Property taxes, if separately paid by you or separately stated on your MF billing, should be deductible as taxes if you itemize your deductions.

posted 11-22-2004 21:13            

Their FAQ says: How much will my Donation Receipt be for?
We leave it up to you to determine the fair market value of your donation. We will send you a receipt which describes the donated property and you write in the value.

posted 11-23-2004 04:15               

quote:

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Originally posted by bannerman987:
>> The donation deduction allowed is the fair market value in your hands of the donated property. That means the amount you could sell it for on the resale market. <<
http://www.donateforacause.org/faq.php has about 20 "donated" timeshares on ebay right now.

Their FAQ says: How much will my Donation Receipt be for?
We leave it up to you to determine the fair market value of your donation. We will send you a receipt which describes the donated property and you write in the value.

Safe to say many people will write in a number much higher than what these ultimately end up for on ebay?

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You can put any number you want on the form. When you get audited, it's up to you to prove the value. In the IRS, you are guilty until proven innocent.