Archive for the ‘real estate’ Tag

Timeshare Tax Issues

Originally published in the Cedar Street Times

September 7, 2012

Timeshares sound like a great idea, but you need to be very careful and do your research before acquiring one.  After the timeshare honeymoon is over, owners often find themselves stuck with an unwanted monthly or annual financial obligation and an “asset” that is very difficult to sell or even give away.  It is so bad that there are even organizations out there that will charge you a fee to take the timeshare off your hands!  Besides these issues, there are also some tax pitfalls for the unwary.

When you attend a sales presentation you will likely be told that your interest and taxes on the timeshare are deductible just like your primary home and that you can rent out the timeshare like a rental property if you choose.  Do yourself a favor and do not take tax advice from your timeshares sales representative.  The large majority of timeshares in the U.S. are fee-simple interests in real property- meaning you have a deed to a specific property with all the burdens and benefits of ownership as your home likely is.  If you take out a mortgage to buy the timeshare; if the mortgage is secured by the deed to the property; and if you treat it as your second home for tax purposes, you will typically be able to deduct the interest.  (Note that if you bought the timeshare with a loan not secured by the property or on a credit card, you would lose the interest deduction.)

There are, however, an increasing number of timeshare interests that are written as “right to use.”  These are essentially leases and are often coupled with points systems (some points systems are still tied to a fee-simple deed).  If you have a right to use contract, you will be disqualified from deducting the interest.  One way to solve this problem would be to pay for the timeshare with a line of credit secured by your main home:  you can deduct mortgage interest on the first $100,000 of debt regardless of what you buy with it.

In a similar parallel, real property taxes must be assessed against an interest in real property.  They also must be broken out from maintenance dues and other fees.  Surprisingly, some timeshare operators do not split this out on your statements, and you may have to call to get this information.

If you rent out your timeshare, you are presumed to be subject to the vacation home rules (see my prior two articles) limiting your deductions to the income generated.  In other words you cannot take a loss as you may with a regular rental property.  This is because vacation home rules take into account the activity of all owners.  For timeshares this means you have to count the personal use of the other 25-50 owners that have a week or two interest in the property as well!  The courts and the IRS have different views on the precise application, but either way, it is still not tax friendly.

Finally, if you are able to sell your timeshare, resulting in a nearly guaranteed loss, it will generally be a nondeductible personal loss.

Buyers beware!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Why You Should Donate Appreciated Assets Instead of Cash

Originally published in the Pacific Grove Hometown Bulletin

March 7, 2012

Last issue I spoke about the issues surrounding charitable deductions for donated goods or services.  I mentioned at the end of the article a much better way of making donations rather than through the contribution of goods, services, or even cash – that way is through  the donation of appreciated assets.  I will use stock in my explanation below, but keep in mind this same principal generally applies to any appreciated assets including mutual funds, real estate, art work, collectibles, etc.

The donation of appreciated assets, such as stock, is an incredible tool if you 1) have some, or 2) can plan to have some for donations down the road!  Donating appreciated stock is like having your cake and eating it too: you basically get two tax benefits.  Here is how it works.  Let us assume you buy $1,000 of stock, and over time, and after a treacherous dip to $400 (!), it rebounds and climbs to $1,500.  Then let us assume your favorite charitable organizations need funds.  You could sell that $1,500 of stock and give the cash proceeds to the organization.  You would  get a $1,500 charitable donation, but you would also have a taxable gain of $500 ($1,500 sales price less $1,000 cost) since you sold the stock.

Instead of selling the stock, let us assume you transferred the stock in-kind to the charitable organization.  You still get the $1,500 charitable donation but you do not have to pay any tax on the built-in-gains of $500.   This could be a huge benefit, especially if you have stock that has appreciated substantially over many years.  You would be much better off making your charitable contributions in this manner, rather than writing checks.

For those with no appreciated stock, long-term planning might suggest opening a separate brokerage account and investing money each year in growth stocks to be used in the future for making donations in lieu of your less favorable cash.  This may take a number of years to achieve, but eventually you could turn the tables and find yourself making your larger donations in appreciated stock, saving you even more tax.

Keep in mind, if you plan to donate something other than financial assets that have a readily determinable value, you would typically need an appraisal if the value is over $5,000.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.