Timeshares might sound great, you and some other people purchase partial ownership in a vacation property and could use the property for a predetermined time every year. In some cases though, it might not provide you with the financial goldmine you’re expecting.
Fortunately, you might able to obtain a tax deduction when you suffer losses on your timeshare. However, this isn’t always the case.
How You Use Your Timeshare Matters
If your timeshare is personal use, like for taking personal vacations, you won’t be able to claim a deduction for your losses regardless of the amount you lost. According to IRS rules, personal losses, including losses on timeshares and vacation houses, aren’t deductible, explains one of the top timeshare lawyers in the area. On the other hand, you might be able to deduct your loss on a timeshare if you use it as a rental or investment property.
You likewise need to determine whether your loss is a short-term or long-term loss. Essentially, it’s a long-term loss if you owned your timeshare for more than a year. While losses for a timeshare that you owned for less than a year before you sell it is considered a short-term loss. This is crucial when you need to offset both short and long-term gains since you must offset losses first against comparable gains.
Also, to claim a loss, you should realize that loss, meaning that you should sell your timeshare at a capital loss. If its market value depreciates, it would be an unrealized loss, and this isn’t deductible since it could increase while you still own the timeshare. To illustrate, let’s say that you paid $12,000 for your timeshare that’s now worth only $6,000, you won’t get to claim a deduction just yet. If you sell your timeshare for $6,000, you would be entitled to a deduction worth $5,000.
A Note on Deduction Limits
Basically, there’s no limit on the amount you could write off just as long as your capital gains are greater than your capital losses for that year. Additionally, even if your gains are lower than your losses, you could still deduct as much as $3,000, or $1,500 if you file separately and are married, every year against other income sources, such as self-employment income or interest income, and wages. While extra losses could carry over the following year. Consult with a lawyer experienced in timeshare transactions to learn more.