TS Rental and IRS

[vkhome]

When you rent your timeshare, are you legally required to declare the rental money as additional income on your IRS return? And, if so, do you declare profit after payment of maintenance fee or just gross income? I don't think a TS maintenance fee is actually tax deductable, is it?

 

[Dave M]

Yes, you must report the income. Many people believe the "vacation home" tax rules apply to exempt such income from tax, but those rules do not apply except in very unusual circumstances.

In determining your taxable income from the rental, you are allowed to deduct maintenance fees, property taxes (if separately paid, such as in California), interest expense on your loan, rental advertising, rental commissions and depreciation. Any other expenses directly related to the rental would also be deductible.

Depreciation would be based on original cost, if you rent it before ever using the week for personal purposes (including an exchange, use by family or friends, etc.). Otherwise, depreciation is based on the lower fair market value in your sales market - the resale marketplace - as of the date you first rent the timeshare. The rate of depreciation should be 3.485% of the allowable "cost" (as discussed in this paragraph). In later years, the depreciation would generally be 3.636% of that same number.

Travel expenses to visit the timeshare and other expenses that are generally related to taking a vacation and only incidentally related to renting the timeshare are not deductible.

If you have a net profit after claiming the allowable deductions, it's taxable. If you have a net loss, it's almost always not deductible, but the loss can be carried over to future years.

See post #4 in this thread for more info on the rules associated with the taxability of timeshare rental income, including why losses aren’t deductible and why the vacation home tax rules don’t apply.

 

[vkhome]

Thanks, Dave for your information. What about the special assessment fee that was paid this year (over $2000)?

 

[Dave M]

Interesting question and one where I believe the tax law is not clear. However, I'll give you the answer, which I believe reflects the intent of the law. Also, this discussion is related solely to rental income deductions, since maintenance fees would not otherwise be deductible.

First, to differentiate, if this had been a special assessment of property tax for a local area, it would not be deductible. The law is clear on that, for the reason that such assessments are almost always for improvements such as sewers, road improvements or other items that should be capitalized and (if appropriate) depreciated for tax purposes.

To determine the deductibility of a special assessment related to timeshare maintenance fees, it's appropriate to look to the reason for the assessment. Thus, look at the letter from the HOA or management company or ask some questions.

If the assessment is solely related to current operations (unexpected repairs, etc.), the entire amount should be deductible as a current rental expense. If the entire amount is solely related to improvements, such as a new swimming pool, an expansion of the activity center or a new parking garage, the entire amount should be capitalized and depreciated as discussed above.

If, however, the letter indicates that the assessment is for both improvements and current operations, you'll need to make an allocation. The IRS would probably accept any reasonable allocation that you make.