IRS Looks at Investment Loss Claim on Real Property

All of the following quotes are directly out of
IRS Publication 544 “Sale and Other Dispositions of Assets”

All non-IRS comments are in italics

The first step is to determine what you have. Based on IRS definitions, a timeshare is an asset and its disposition is subject to IRS regulations. NOTE: When it says ordinary gain or loss remember it is referring to adding to or subtracting from your gross taxable income.


Capital Assets
Almost everything you own or use for personal purposes or investment is a capital asset.

Personal-use property. Property held for personal use is a capital asset. Gain from a sale or exchange of that property is a capital gain. Loss from the sale or exchange of that property is not deductible. You can deduct a loss relating to personal-use property only if it results from a casualty or theft.

Investment property. Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from it’s sale or exchange is a capital gain or loss. This treatment does not apply to property used to produce rental income.

Noncapital Assets
A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets.
4. Real property used in your trade or business or as rental property, even if the property is fully depreciated.

Business assets. Real property and depreciable property used in your trade or business or as rental property. . . are not capital assets. The sale or disposition of business property is discussed in chapter 3.


The first determination is whether the timeshare or property is held for personal or business rental use. Before you claim it as business rental use, you better have all the bills and receipts associated with the process and clearly showing your intent to rent the property, whether you were successful or not. It must be clear that rental was your intent for a reasonable period of time (consider going back at least one year).

If you can establish a proven track record of attempting to rent it, you can deduct any loss associated with it. If not, it is considered personal-use property and you can not deduct any loss.

Chapter 3 referred to above deals with determining if the gain or loss is to be reported as a capital gain or loss. Essentially, as a non-capital asset, any gain or loss is reported as regular income and not subject to the reduced capital gain tax percentage. A capital loss can be taken as a limited $3,000 loss but a gain is taxed at a lower tax bracket.


PROPERTY CHANGED TO BUSINESS OR RENTAL USE
You cannot deduct a loss on the sale of property you acquired for use as your home and uses as your home until the time of sale.

You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited.


The word ‘home’ includes your timeshare or vacation property. If you bought the timeshare or property to use personally, or did use it personally at any time, you can change that use to business use, but you must divide any gain or loss by the amount of time it was used in each category. If your timeshare was used by you for 8 of the 12 years and you have proof of your attempt to rent it the other 6 years (no proof = personal use), 2/3 of everything is considered personal-use and only 1/3 is considered business use.


Property Used Partly for Business or Rental
If you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property.

Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss. Any gain on the personal part of the property is a capital gain. You cannot deduct a loss on the personal part.


An example is in the Publication 544 that shows this computation. The final element was to show that even though a $15,000 net loss was taken on the property, only $2,380 was considered the actual loss because of the difference in personal (2/3) versus business (1/3) use. The personal portion of the loss is not deductible while the business portion has some limitations to its loss.


Abandonments
The abandonment of property is a disposition of property. You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else.


This is a tricky question. According to the IRS any transfer is considered disposition of ownership. Abandonment is literally, walking away and allowing the property to undergo foreclosure (which brings other questions and concerns into focus) or reclamation by the governing government (usually the county) for non-payment of taxes and assessments.


Loss from abandonment of business or investment property is deductible as an ordinary loss. Even if the property is a capital asset. The loss is the property’s adjusted basis when abandoned. This rule also applies to leasehold improvement the lessor made for the lessee that was abandoned.

You cannot deduct any loss from abandonment of your home or other property held for personal use.


Again, if any loss is to be claimed, it must be a business property, not a personal-use property.

There are other references in Publication 544 to Fair Market Value at the time of disposition but that is treated in another whole article. Essentially, one thing implied in Publication 544, again, is that a FMV can be determined by the sale price received by the entity that receives the timeshare or property, but that has to go back to other publications to find that the time limit is considered 36 months.

Without a sale price, FMV is determined by purchase price and/or replacement price in most cases. So, if your purchase price for the property was $20,000 and you did try to rent it but can only show records for 1/4 of the time you owned it, you can only consider $5,000 as the business portion which can be taken as a loss against other income.

Another option is to donate to a federally authorized charity (nonprofit organization). Doing this falls under other guidelines and can end up with a much greater income deduction than a claim as a loss.

Timeshare Swaps - Creative Timeshare Travel + $0 Exchanges Fees

Here’s a clever idea for using that timeshare you no longer use or even want. This is based on a few assumptions - 1.) You still like and want to travel; 2.) You’re willing to travel to non-specific locations (not necessarily your top #1 choice of location of resort); 3.) You can continue to pay your owner’s fees; and 4.) You can afford to travel even if it's only somewhere close to home.

There are homes swap exchange sites all over the world. Now, you would never consider swapping your home to a stranger, but what about your timeshare? If you bought one because it’s in an attractive location, it’s attractive to others as well. Even if you can’t exchange it through RCI, II, or other timeshare exchanges, you have a whole other market to use - home swap exchanges.

Why does this work? For the same reason you initially bought your timeshare. People want to travel, live in some comfort and want to save money at the same time. Those that swap their homes generally find that their precious keepsakes are still there intact when they return and, since it didn’t cost them more than the cost of their own home during the swap period, it saves money. Your home costs you 1/4 the monthly mortgage, insurance, utilities, etc. per week and you have to pay those whether your home is vacant or used by someone else. If you exchange the home use, you don’t have to pay the extra $200+ per day a resort quality hotel costs you for your vacation stay. Your timeshare costs you the owner’s fees for the week, whether it’s used or not.

Let’s consider the process. Visit several home exchange web sites. They can be found through a search for “Home Exchange” or “Home Swap”. Here is the Alexa.com page (ranks the top visited web sites) for Home Exchange sites - Alexa Top Home Exchange Sites.

Once on one of the sites, browse or search through the listings for something in an area you might be interested in visiting. Some sites allow you to browse by requested locations of the listing properties. In that case, put in the city your timeshare is in. You will find that people that swap homes often have as much flexibility as you do now that you have a hard time getting anything through a “normal” TS exchange program. Follow the site direction on anything that fits for you and you’re on your way. You just traded a timeshare you’re not using to someone that wants to vacation in that area and got the use of a similar lodging in an area you want to go to - usually at a greatly reduced exchange price. In fact, this is what you will usually find regarding fees. 1. Is this really a free service? What is the catch? Is there any commission based charge at a later time, once the exchange or rental has been arranged? (Answer) There is no catch. The service is absolutely free. There is no charge for listing properties. There is no commission fee if you arrange an exchange or rental. No fees at all.

Ultimately, what is your cost? Your travel expenses minus any lodging costs you would spend for the week in the location plus your owner’s fees. In other words, $3,000 - ($150/night x 7 nights @ $1,050) = $1,950 + $1,000 (owner’s fees) = $2,950. Now you’re using your timeshare for traveling the world without the cost and hassle of RCI, II or other timeshare exchange clubs.

Let’s throw in a twist. When you make the swap, let the other party know you would be willing to sell them the timeshare at a reduced price if they do the following: 1.) Take the resort tour and find the best price they can BUT NOT buy from the resort; 2.) Notify you of what the resort’s best price was (ask for a copy of the presentation paperwork); and 3.) Sell it to them for a % or $$ less than that best resort price. You might want to use an actual Option to Purchase agreement noted in another blog at http://timesharedonation.wordpress.com/2007/11/03/timeshares-rent-to-sell/ we’ve posted or gained from the Internet or an attorney. You will find that many home exchange people actually own multiple locations and are interested in the flexibility a timeshare could give them in furthering their own travel opportunities by trading it out. That is, if you still want to sell it after doing this for yourself.

Enjoy your vacation,
Dr. Ken Rich

Timeshares - Rent to Sell

This is a great twist on a very long standing real estate method. I read about the idea recently and want to pass it on to others. If the original poster can contact me, I’d be very happy to give them credit for the idea.

You want to sell. You would be willing to rent if you can’t sell. However, if you rent, you often have to rent it really cheap to attract those interested in a “great” rental deal (read that as low cost). How can you get a little more cash for the rental and potentially sell your timeshare? Enter the option to buy plan.

First, recognize that you have to separate the cheap renters from those truly interested in buying. Next, do something similar to what the resorts do to get potential customers - give something of value to the potential buyer (just don’t do the give your time away). Finally offer to sell it at a price less than the resort so both parties feel good about the sale. As they say, “The Devil’s in the details.”

Set your fee for rental at about what your annual fees are. I know this won’t attract the low ballers, but it will work with the right renter/buyer. Advertise in places like www.Craigslist.com , local newspapers in the area of your timeshare, local newspapers in VERY large metropolitan areas with people that traditionally go to your resort area, and any other free or very low cost listing location like timeshare users groups, www.RedWeek.com, and similar web sites. Make sure you begin advertising several months before the date of your week.

Your ad should stress the Rent to Own factor, not the cheap rental. Let the reader know they can “Try it before they Buy it.” Let them know your charge is to cover your annual fees so they know up front what to expect if they end up buying. Explain to them, when they contact you, that if they decide to rent it, visit the timeshare without the stress of a sales presentation, have more time than the limit of only a few days as the resorts normally do, and finally decide to buy, all they have to do is check what the resort is selling for and you’ll be willing to sell it to them well below that price. You might even offer to credit their rent as part of the purchase price if they complete the sale.

Here’s a twist on the above suggestion. Talk to the resort in advance and tell them you are planning on sending a friend to stay in your unit. Ask them what they might give you as a referral if you can talk the friend into taking the tour, whether they buy or not. Now when the potential renter contacts you, tell them you can credit them with up to twice the rental cost if they will take the sales tour on one of their days but they don’t have to decide to take that tour until they arrive and see the resort first hand. If they do take the tour, decide to buy, complete the contract with the resort, they will have a few days to rescind the contract and get their money back without penalty. Tell them to call you, fax a copy of the purchase contract to you (or a copy store near you) immediately. You will agree to sell yours to them at a cheaper price. Now, if they are really interested in buying, this will give them the incentive to get their best price and contact you to buy yours instead.

What’s the risk to the buyer? They have already agreed to purchase at the resort’s price. All they are doing is trying to use that deal to get a better deal. Since you really want to sell, there is very little chance you will back out of the deal. The only consideration is timing and financing. Once they send a fax to you of the contract, they have established the purchase price of the option if you have agreed to a $ or % below the resorts best price to them.

If they need to finance the purchase, do a little homework and an Internet search for “Timeshare financing”. There are a few companies that will finance secondary sales. Do this BEFORE you begin trying to rent it and have them ready when the time comes to use them. Find out what their financing requirements are and tailor your sales contract to reflect those requirements.

The Devil details. What you will need is a general contract for someone renting your timeshare. If you don’t know what you’re doing, find a closing company on the Internet. Many of them will already have this service of rental contracting for a nominal fee. It’s worth it to be safe and secure. In addition, you will need a fairly simple Option to Purchase agreement separate from the rental contract. you can often get this from a Realtor in your area as a sample. Essentially all it says it that the Renter will have the option to purchase the timeshare upon completion of the rental contract plus X# days following that for a specific price (can be a % of resort price, $$$ below the resort price, etc. any way you want it worded that makes sense). If you’re going to give them credit for their rental fee, include that as well. Try to keep it as simple as possible. It should be less than 1 page when you’re done. Here’s a sample you can follow. Please remember, I’m not an attorney and if you’re concerned, please seek a legal opinion. I’m sure they will want to add a lot more to the option contract. Make sure there is no specific tie between the two contracts other than as mentioned in this example. Don’t combine the payment on the two contracts.
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Option to Purchase Timeshare

This agreement is by and between (the names that appear on the current timeshare), hereinafter known as Seller, and (the names of the renters wanting this option to purchase), hereinafter known as Buyer.

Buyer wishes to buy and Seller wishes to sell the timeshare described as (legal description as found on your deed) .

Therefore, this option to purchase is made under the following conditions:
1. The option purchase price shall be $1.00 paid by the Buyer to the Seller, which shall not be refunded nor applied as part of the purchase price under any circumstances and shall be forfeit by the Buyer in the event the parties do not complete the purchase transfer of the timeshare.
2. The Buyer shall rent the timeshare during the dates of (Specific dates on the rental contract) according to the rental contract separate from this Option to Purchase.
3. Upon completion of the rental period, the Buyer shall have 30 days to exercise this option or it shall become null and void with forfeiture of the option purchase price by the Buyer.
4. The Timeshare purchase price shall be $____________. (or $________ below the price offered by the Resort to the Buyer in writing, or some % below the Resort price, or some other agreed upon criteria for establishing a sale price. These alternatives in ( ) should replace the initial $_________. Use only one of the choices given here, don’t confuse the issue by multiple pricings.)
5. Seller shall credit the Buyer with the full rental fee paid as part of the purchase price to be credited as down payment. Under no circumstances shall the rental fee be considered anything other than rent unless there is a completion of the purchase from the Seller to the Buyer at the price established above.
6. If financing is required, the Seller shall cooperate fully with the Buyer in their attempt to acquire financing.
6. Closing shall be by an agreed upon closing company experienced in title transfers of timeshares in the area of the timeshare location. (If you’ve established a closing company already, put their name here instead of the general statement.)

No other conditions or terms have been agreed upon except as written herein. Any modification to this contract must be in writing signed by both parties. Any legal action taken as a result of this Option to Purchase shall be governed by (your state) and must be filed in the (your county).

_______________________________________ _____________________
Seller Date

_______________________________________ _____________________
Seller Date

_______________________________________ _____________________
Buyer Date

_______________________________________ _____________________
Buyer Date

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The concept here is to find a person interested in buying at your resort, but wanting to try before they buy. Give them that opportunity plus the ability to buy for less then the resort’s best deal to them. Don’t look for the cheap renters. They seldom want to buy, anyway. If you consider the resort giving a few free days to potential buyers as an indication of your needing to give a full week away free to compete, don’t! Those who take advantage of such offers generally know it advance what their getting and why. Many people would like to try but don’t want the high pressure sales approach. This gives them that option.

Good luck in your endeavor.

Dr. Ken Rich