Whether enjoying the sunny weather and relaxed atmosphere of a beach town or looking to spend more time at a popular amusement park, a timeshare provides an opportunity to make the most out of a destination you enjoy. Like any large purchase, it may impact your taxes. Three specific areas to watch out for include:
#1: Taxes will apply if you rent the timeshare.
If your timeshare arrangement provides the opportunity to rent it out when you are not using it, you may need to claim the rent you receive as income on your federal tax returns. There are various rules and calculations that are used to determine whether this is taxable income.
In some cases, the rental agency may provide a 1099. Be aware that if you received this form, the IRS likely also received a copy and will look for the rental income on your returns. Understanding how these forms are used and processed can help avoid mistakes—see this overview of IRS forms and notices for additional context.
If you believe that you qualify for an exception, keep careful records to defend your stance in the event of an audit. Rental income reporting errors are a common issue that can raise red flags, and it is helpful to understand what typically triggers an IRS audit.
#2: There are unique tax obligations when you sell this type of property.
The IRS generally takes an unfortunate stance on this. In most cases, the IRS will tax any gains from the sale of a timeshare but does not allow the deduction for losses. Disputes over reported gains or basis calculations can sometimes lead to audits or follow-up notices. If you receive such a notice, it is important to understand how the audit process may unfold and what options may be available.
#3: There is the possibility for tax deductions.
There is the potential for some tax benefits. For example, taxpayers can often deduct any interest paid on a loan to purchase a timeshare. The Internal Revenue Service (IRS) generally allows taxpayers to deduct this type of interest on up to two properties. In most cases, the agency allows those who own more than two qualifying properties to choose which two they use for this deduction.
You can also deduct property taxes — but do so carefully. Timeshare owners must make sure that the tax is either billed separately or stated separately on the timeshare maintenance fee billing. The IRS is unlikely to accept the claimed deduction if the property tax bill is lumped in with other fees.
Improper deductions or unsupported claims can increase audit exposure. Taxpayers who own property in multiple states should also be mindful of residency-related issues, especially if they spend extended time outside their home state. For additional insight, see what snowbirds should know about residency audits.
It is also important to note that these laws are subject to change. For example, the Florida legislature is currently considering a proposition that would directly impact the taxes of timeshare owners. Staying informed about legislative and regulatory developments—such as those discussed in recent tax law updates—can help prevent unexpected liabilities.
Navigating the tax implications of the purchase, use and sale of a timeshare can be a difficult process. The attorneys at Goldburd McCone can help you understand this process and better ensure you make an informed decision that best meets your financial goals.