Tax on timeshare rental income, depreciation questions

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Chip Munk
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Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

We own a timeshare and have not used it for the last couple of years due to Covid. I arranged two rentals this year and one for 2023 through a rental broker. I've been researching how much of the rental income will be taxable. I believe I can deduct the property taxes and all of the management fees except for capital reserves from the rental income but I'm confused about depreciation.

From what I read, I can deduct depreciation based on the market value of the property at the time it was "converted to rental use". I made a note of the estimated market value back when the first rental occurred (about 50% more than I paid for it) so I have the data I need to calculate the depreciation but I'm confused by the term "converted to rental use". While I did not stay there myself in 2022 and there will be part rental and part personal use in 2023, I hope it will revert to personal use only in 2024 and beyond so in my mind I haven't converted it to rental use, this is a temporary situation.

So here are my questions:

1. What does "converted to rental use" really mean to the IRS?

2. Let's say I deduct the applicable depreciation percentage on my 2022 and 2023 tax returns but then we use it exclusively for a few years. Does anything need to happen tax-wise when I "convert" it back to personal use only, or do I just keep track of the depreciation I took until/if I sell it down the road?

3. After using it exclusively ourselves for a few years, if I then rent it out again, do I pick up where I left off on the depreciation schedule, or does the clock restart and I need to establish a new current market value for depreciation purposes?

4. If we sell our timeshare, would the basis be what I paid for it or the higher market value established at the time it was converted to rental use? I understand that I would need to account for any depreciation I took in prior years when figuring the tax due on the sale.

Thanks in advance for any advice.
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Chip Munk
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Re: Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

Giving this a bump in hopes someone can offer some helpful advice.

I would be fine ignoring any depreciation I am entitled to deduct, except that I recall there are situations where when you sell something you have to account for depreciation you've taken or could have taken. If this is the case here, then I should deduct it now, assuming I'm entitled to do so.
lstone19
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Re: Tax on timeshare rental income, depreciation questions

Post by lstone19 »

I am curious about this as well. There's an article at RedWeek about this: https://www.redweek.com/resources/artic ... -timeshare
LifeIsGood
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Re: Tax on timeshare rental income, depreciation questions

Post by LifeIsGood »

Your post didn't say how many days a year you might be renting out your timeshare. If it's 14 days or less per year, the income is tax free. Google "The Augusta Rule". This approach might be a lot easier and neater compared to tracking depreciation and any possible recapture down the road.
lstone19
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Re: Tax on timeshare rental income, depreciation questions

Post by lstone19 »

LifeIsGood wrote: Wed Nov 23, 2022 6:14 am Your post didn't say how many days a year you might be renting out your timeshare. If it's 14 days or less per year, the income is tax free. Google "The Augusta Rule". This approach might be a lot easier and neater compared to tracking depreciation and any possible recapture down the road.
I believe that rule also requires that you use the property as your residence at least 14 days each year. Since the typical timeshare ownership is for only seven days per year, that standard will not be met (which brings up another question - if you own multiple weeks in the same timeshare, each with its own deed, is each its own independent property for purposes of this rule or do you consider the total number of days owned and treat them as one property? I've seen no guidance from the IRS on that point).
lstone19
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Re: Tax on timeshare rental income, depreciation questions

Post by lstone19 »

Chip Munk wrote: Sat Nov 19, 2022 2:49 pm I've been researching how much of the rental income will be taxable. I believe I can deduct the property taxes and all of the management fees except for capital reserves from the rental income but I'm confused about depreciation.
At least where we own, we pay one maintenance fee per week every year that includes property taxes. I have never read anything to suggest I need to dig into the property's budget to determine how much of the maintenance fee is reserves. The entire maintenance fee is an expense of your rental business. If you exclude reserves, then you also need to see what was spent from reserves as if you don't deduct amounts going to reserves when paid into the reserves, you would be entitled to deduct it when reserves are spent.

Our own situation has us renting some of our weeks in 2023. We will make about $5 per week (excess of net rent after agent commission over the year's maintenance fee). After depreciation, a non-deductible loss. Even for weeks bought resale (so at close to real value rather than the inflated developer price), we're unlikely to see a profit if we sell (and not likely as we actually use the weeks - this week an exception due to our moving our primary residence). So I will keep good records but probably do no more than is necessary to legitimately show no income on our tax return.
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Chip Munk
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Re: Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

LifeIsGood wrote: Wed Nov 23, 2022 6:14 am Your post didn't say how many days a year you might be renting out your timeshare. If it's 14 days or less per year, the income is tax free. Google "The Augusta Rule". This approach might be a lot easier and neater compared to tracking depreciation and any possible recapture down the road.
As I understand it, for the rental income to be tax free, in addition to renting it out for 14 days or less I and/or friends or relatives of mine must stay there for a total of 15 days or more. I did not use it (or make it available to friends/relatives) at all in 2022.
Last edited by Chip Munk on Wed Nov 23, 2022 2:07 pm, edited 1 time in total.
its4inthemorning
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Re: Tax on timeshare rental income, depreciation questions

Post by its4inthemorning »

I may be wrong, but it is my understanding that the tax basis of property converted from personal to business use is the lesser of FMV at the time of conversion or original cost.
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Chip Munk
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Re: Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

lstone19 wrote: Wed Nov 23, 2022 10:59 am
Chip Munk wrote: Sat Nov 19, 2022 2:49 pm I've been researching how much of the rental income will be taxable. I believe I can deduct the property taxes and all of the management fees except for capital reserves from the rental income but I'm confused about depreciation.
At least where we own, we pay one maintenance fee per week every year that includes property taxes. I have never read anything to suggest I need to dig into the property's budget to determine how much of the maintenance fee is reserves. The entire maintenance fee is an expense of your rental business. If you exclude reserves, then you also need to see what was spent from reserves as if you don't deduct amounts going to reserves when paid into the reserves, you would be entitled to deduct it when reserves are spent.
My impression that capital reserves would not be deductible came from this article, although the author describes them as "special assessments" so maybe I'm on the wrong track here. https://tug2.net/timeshare_advice/incom ... ntant.html Special assessments for remodeling, roof and furniture replacement and similar expenditures would not be deductible. Special assessments for repairs and unexpected current expenses might be deductible, depending on the nature of the expenses.

Where I own they break out the annual fees into many categories, with individual line items for capital reserves, property taxes, housekeeping, etc. so I know how much of my annual fees go towards capital reserves but I don't recall if they tell us how much was spent each year and on what.
Our own situation has us renting some of our weeks in 2023. We will make about $5 per week (excess of net rent after agent commission over the year's maintenance fee). After depreciation, a non-deductible loss. Even for weeks bought resale (so at close to real value rather than the inflated developer price), we're unlikely to see a profit if we sell (and not likely as we actually use the weeks - this week an exception due to our moving our primary residence). So I will keep good records but probably do no more than is necessary to legitimately show no income on our tax return.
This is where the capital reserves will be helpful. Right now my timeshare would sell for about 50% more than I paid for it, but I believe I can increase the basis by all the money I've paid into capital reserves over the years I've owned it, except for any part of it I end up deducting to reduce rental income.
lstone19 wrote: Wed Nov 23, 2022 10:37 am I believe that rule also requires that you use the property as your residence at least 14 days each year. Since the typical timeshare ownership is for only seven days per year, that standard will not be met (which brings up another question - if you own multiple weeks in the same timeshare, each with its own deed, is each its own independent property for purposes of this rule or do you consider the total number of days owned and treat them as one property? I've seen no guidance from the IRS on that point).
Good question.
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Chip Munk
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Re: Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

its4inthemorning wrote: Wed Nov 23, 2022 2:03 pm I may be wrong, but it is my understanding that the tax basis of property converted from personal to business use is the lesser of FMV at the time of conversion or original cost.
Thank you! A couple of articles on renting out a timeshare stated something along the lines of the following about depreciation:

How do you calculate depreciation expense? If your timeshare is newly purchased, you can base your claimed depreciation expense on your purchase cost. However, if you have previously used your timeshare for personal purposes (including an exchange or use by friends or family), you must base your depreciation on current value - which means resale value - as of the date you convert to rental use.

After reading your comment, a google search turned up IRS Publication 527 -- Residential Rental Property (Including Rental of Vacation Homes) and it states:

Basis of Property Changed to Rental Use
When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of the fair market value or adjusted basis on the date of conversion.


Perhaps the writer(s) of the articles I read assumed that a timeshare's value declines after purchase so the current market value would be the "lesser" value. That is not the case with mine, and I would have used the wrong value for depreciation. Thank you for posting the correct information.
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Re: Tax on timeshare rental income, depreciation questions

Post by WoodSpinner »

ChipMonk,

How do you determine fair market value for a Timeshare? Am surprised that yours is worth 50% more than you paid.

WoodSpinner
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Re: Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

WoodSpinner wrote: Wed Nov 23, 2022 4:41 pm ChipMonk,

How do you determine fair market value for a Timeshare? Am surprised that yours is worth 50% more than you paid.

WoodSpinner
There is a very active resale market. When an offer is submitted for a resale contract, the details of the deal must be submitted to the developer who has the right to buy back the contract for themselves at the agreed price. A couple of online forums track the prices of the offers submitted for approval (supplied by the potential buyers and/or sellers) and whether the purchase went through or the developer stepped in and bought back the contract to resell it themselves. The primary purpose of the data is to help buyers price their offer so it will be high enough to get through ROFR (Right of First Refusal).
Last edited by Chip Munk on Wed Nov 23, 2022 5:38 pm, edited 1 time in total.
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WoodSpinner
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Re: Tax on timeshare rental income, depreciation questions

Post by WoodSpinner »

Chip Munk wrote: Wed Nov 23, 2022 4:56 pm
WoodSpinner wrote: Wed Nov 23, 2022 4:41 pm ChipMonk,

How do you determine fair market value for a Timeshare? Am surprised that yours is worth 50% more than you paid.

WoodSpinner
There is a very active resale market. When an offer is submitted for a resale contract, the details of the deal must be submitted to the developer who has the right to buy back the contract for themselves at the agreed price. A couple of online forums track the prices of the offers submitted for approval (supplied by the potential buyers and/or sellers) and whether the purchase went through or the developer stepped in and bought back the contract to resell it themselves. The primary purpose of the data is to help buyers price their offer so it will be high enough to get through ROFR.
Thanks ….
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Re: Tax on timeshare rental income, depreciation questions

Post by ChrisC »

In addition to an active resale market where one can ascertain fair market value for some timeshares where the developer has price support mechanisms like right of first refusal (http://rofr.net/), it’s not difficult to establish fair market valuations for timeshares that have appreciated in value, especially those bought pre-construction from a developer many years ago or bought re-sale. Moreover, there are some timeshare owners with large multiple holdings who have made a commercial enterprise with renting out their timeshare interests. Recently, Marriott imposed a 20K annual restriction on renting out Marriott Destination Club points to curb so-called commercial activity in points rentals.
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Re: Tax on timeshare rental income, depreciation questions

Post by hoops777 »

ChrisC wrote: Wed Nov 23, 2022 6:11 pm In addition to an active resale market where one can ascertain fair market value for some timeshares where the developer has price support mechanisms like right of first refusal (http://rofr.net/), it’s not difficult to establish fair market valuations for timeshares that have appreciated in value, especially those bought pre-construction from a developer many years ago or bought re-sale. Moreover, there are some timeshare owners with large multiple holdings who have made a commercial enterprise with renting out their timeshare interests. Recently, Marriott imposed a 20K annual restriction on renting out Marriott Destination Club points to curb so-called commercial activity in points rentals.
Yikes!
So we own a one week Marriott timeshare and could not use it so I rented it on RedWeek.
Our Maintenance fees are about 1300 and I rented it out for 1800 minus the RedWeek fees.
I never even thought about having to pay taxes.
This was in 2021 and I never filed anything.
Am I going to jail? :D
We have super simple tax returns 12pct bracket.
So do I have to do an amended tax return over something so trivial in the greater scheme of things ?
K.I.S.S........so easy to say so difficult to do.
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Chip Munk
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Re: Tax on timeshare rental income, depreciation questions

Post by Chip Munk »

Based on this article on Redweek https://www.redweek.com/resources/ask-r ... taxes-2022 it appears they did not send out 1099s in the past but will do so starting this year (2022). A 1099 would have alerted you (and the IRS) that this is considered taxable income.

After reading lots of articles and posts on various timeshare forums today, I still see a lot of confusion and disagreement over what can be deducted from that income.
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