Timeshares as an Investment: Taxes and Related Issues

marinersfan · Sep 2, 2005

The other one was getting to long and this actually could be considered a little different.

If we're trying to get to the bottom of whether or not a TS is an investment, I actually have a question.

Investing in real estate allows me, the investor, to deduct a tremendous amount off my income on the investment and overall tax base like; mileage, interest, taxes, insurance, repairs, improvements, closing costs, utilities, and depreciation. I may have missed some but you all get the point. So if I purchase a TS strictly for renting and/or flipping (buying very low then selling) can I treat that TS like any other investment property?

I write off my closing costs, my MF's, mileage to attend board meetings and check the overall condition of the property. No, I don't get to stay in it, but I need a place to stay while checking on my investment and of course thats a write off too.

It still may not be worth the effort, but at that point I now consider it an investment.

Any thoughts, especially from accountans/tax advisors?

Dave M · Sep 2, 2005

See this thread for the tax treatment of timeshares, including deducting (or not deducting) the various expenses.

Investing in real estate allows me, the investor, to deduct a tremendous amount off my income on the investment and overall tax base like; mileage, interest, taxes, insurance, repairs, improvements, closing costs, utilities, and depreciation.

Well, that's partially correct.

Improvements and closing costs are not deductible. Generally, they add to the total cost of the property. Even mortgage points on an investment property are not currently deductible in the year incurred. Taxes are currently deductible. The other expenses, including interest have limitations and can generally only be deducted only up to the amount of income generated from the property. If your total income from all sources is more than $100,000, you will be limited as to how much if any of a rental loss can be deducted.

[For a timeshare] I write off my closing costs, my MF's, mileage to attend board meetings and check the overall condition of the property.

Again, only partially true. Closing costs are added to the cost of the property and are not deductible. Generally, where someone else manages the rental property on a full time basis, with you having no responsibility other than finding a renter, you cannot claim travel expenses. The expenses must be reasonable as related to the property.

Thus, if you drive 400 miles to attend a board meeting and turn around and drive back the next day, there's an argument for deductibility. However, if you drive 400 miles and attend a board meeting for your timeshare as part of a one-week stay at the resort or in the area, you will not be entitled to a deduction, based on IRS rules. You might justify it if you were actively managing the timeshare. I believe that's impossible to prove for a timeshare that has an active management company running the resort.

The bottom line is that the rules are similar. There are differences. The most important difference is that the losses on a rental property that you rent on a month-to-month or annual basis might be deductible, depending on how much your income is. But the losses on a timeshare that you rent out will virtually never be deductible, as explained at the link in my first paragraph.

Also, I have made a slight change to your title to avoid confusion with the other thread.

BocaBum99 · Sep 2, 2005

I've considered investing in condos for the past 5 years. I own one property that I bought on a whim in the mid-80's that I am now going to sell.

Here is what I concluded:

1) Investing in rental properties USED to be a good thing since you could depreciate the building and end up with huge losses that you could deduct from normal income and therefore offset cash losses from rentals. This ended in the 80's with tax reform.

2) Most properties in desireable areas are prices at a level where it is very difficult to achieve a positive cash flow, even with 20% down. That significantly reduces your capacity for investing. To achieve positive cash flow, you must wait several years for the rental rates in the area to overtake all of the expenses.

3) The primary source of return is through increases in property prices. You must often times assume a 3-5% or more average increase in property prices for the business case to work.

4) Condo hotels have a nice feature in that there is a good venue for rentals at higher rates. But, that is offset by much higher monthly maintenance fees, taxes, insurance, interest rate premium for mortgage and the hotels roughly 50% take. So, these investments have must achieve significant appreciate to offset negative cash flows.

5) How much you make on a property is as much dependent on whether or not you overpaid for it. In other words, even though property prices on average increase at 3-5% per year, sometimes (like now) they increase at 10-15%. Then, there becomes many years where price growth in next to nil for 10 years or more.

Tying up capital in real estate is a great thing for your primary home because you get tax deductions and you do NOT have to pay taxes on imputed rent. So, the tax system provides great incentives to own your own home.

And, you can make a lot of money investing in real estate if you do it right. As with anything, you must buy low and sell high. Buying high almost never yields great returns even if you get to sell high later.

I do believe that real estate in prime areas will continue to outperform other assets simply because foreigners will buy our best real estate and the dollar continues to weaken over the next several decades.

I'll bet that the best real estate values in the country will be on gulf front property near NOLA over the next year. Just when nobody wants it. The best areas will get rebuilt.

CaliDave · Sep 2, 2005

Dave M said:
Thus, if you drive 400 miles to attend a board meeting and turn around and drive back the next day, there's an argument for deductibility. However, if you drive 400 miles and attend a board meeting for your timeshare as part of a one-week stay at the resort or in the area, you will not be entitled to a deduction, based on IRS rules. You might justify it if you were actively managing the timeshare. I believe that's impossible to prove for a timeshare that has an active management company running the resort.

This is a good question. If I am on the Board. Can I deduct the mileage and overnight stays "bonus time" to periodically check on the property, the management and attend board meetings?

Dave M · Sep 2, 2005

To deduct your travel expenses they must meet several tests. The most basic is that they must be (1) for the purpose of conducting your trade or business or (2) for the direct benefit of a qualifying charitable organization. (I'm excluding discussion of medical and other types of allowable travel which are obviously not applicable here.)

Even the timeshare-related expenses that marinersfan mentions above for visiting a rental timeshare don't qualify, in part because the rental, under IRS rules, is a "passive investment activity", not a rental or other business. Thus, your expenses are not in the conduct of your trade or business, even if you regularly rent out the timeshare.

Obviously, the timeshare doesn't meet the test of a qualifying charitable organization, so you lose.

No tax deduction.

I realize it would seem that you should get a deduction because you are volunteering your time and money to help others and only incidentally to help yourself. Unfortunately, the tax law doesn't work that way.

CaliDave · Sep 2, 2005

I didn't figure I'd be able to.. The tax loopholes never seem to be in my favor

thanks for the explanation

marinersfan · Sep 2, 2005

Aha,

Dave M said:
Improvements and closing costs are not deductible. Generally, they add to the total cost of the property. Even mortgage points on an investment property are not currently deductible in the year incurred. Taxes are currently deductible. The other expenses, including interest have limitations and can generally only be deducted only up to the amount of income generated from the property. If your total income from all sources is more than $100,000, you will be limited as to how much if any of a rental loss can be deducted.

Yes, I was generalizing and since I'm not an accountant didn't want to get into specifics. I'm glad you did.

Dave M said:
Also, I have made a slight change to your title to avoid confusion with the other thread.

No problem at all.

DaveM, if I remember correctly, you are or were an accountant right? You don't have to answer that if you don't want too, but if that's the case then I'd have to take you as a very reliable source, and based on the information you just gave us, how can we justifiably look at owning a TS as being an investment from an investors point of view? Actually, we can always find a way to justify something so let me state it this way: No matter how we twist it, analyze it, or justify it, I'm not seeing how we can call owning a TS a true investment. It might be a great way to spend our money for quality of life, but it can't be considered an investment.

It's just interesting to me because the investment question always comes up. For the past 2.5 years I've been following many of the post, including the one you reference, pertaining to the tax questions on TS's and personally I haven't been able to deem TS's as an investment. I'd like to, but just doesn't seem possible. Maybe it's a matter of how each of use define "Investment".

Thanks again for your input.

Dave M · Sep 2, 2005

Rather than derail the separate topic that justifies this separate thread on timeshares as an investment, I'll refer you to the several current threads on the topic on this forum. I'll simply say that I think most people here would agree that timeshares are not a good economic investment; they are an investment in future vacations.