Is a Timeshare a Second Home for Tax Purposes?
Learn how your timeshare's ownership structure and usage determine its tax status. Understand the key factors for treating it as a second home.
Whether a timeshare can be treated as a second home for tax purposes depends on its ownership structure and how the property is used. The tax implications are defined by the Internal Revenue Service (IRS) and vary based on specific circumstances.
IRS Definition of a Second Home
The IRS defines a “home” as a property with basic living accommodations, including a sleeping space, a toilet, and cooking facilities. A timeshare that contains these three elements can be considered a dwelling unit. This is the first step toward qualifying as a second home for tax purposes.
Beyond its physical characteristics, the property’s use is a determining factor. To be considered a residence for tax purposes, your personal use must meet a threshold defined in IRS Publication 936. You must use the dwelling for personal purposes for more than 14 days or more than 10% of the total days it was rented to others at fair market value, whichever is longer. If your personal use does not meet this test, the property is considered a rental property with a different set of tax rules.
Qualifying for the Mortgage Interest Deduction
Timeshare owners may be able to deduct mortgage interest, a benefit associated with homeownership. The deductibility of this interest hinges on whether the loan is a “secured debt.” A secured debt is a loan where your ownership interest in the property serves as collateral, which requires an instrument like a mortgage or deed of trust. This is the arrangement for a deeded timeshare, where you receive a legal deed for your portion of the property.
If the loan is secured by the deeded timeshare, the interest paid can be treated as qualified residence interest and may be deductible. This interest is reported on Form 1098, which you receive from your lender. The deduction is subject to the same limitations as a primary residence, with interest on up to $750,000 of combined qualified residence debt being deductible for those who itemize. This limit applies to the total debt on your primary and one secondary residence.
A distinction exists between a deeded timeshare and a “right-to-use” arrangement. With a right-to-use or points-based plan, you do not hold a deed but rather a lease or license to use the property. Loans for these interests are often unsecured personal loans, and the interest is considered non-deductible personal interest.
To claim the deduction, you must itemize deductions on Schedule A. If your total itemized deductions do not exceed the standard deduction for your filing status, you will not receive a tax benefit from itemizing.
Deductibility of Property Taxes and Fees
Owners of deeded timeshares may be able to deduct the portion of their annual fees that goes toward real estate taxes. The timeshare management company should provide a breakdown of your annual fees that separates the amount allocated to property taxes from other charges like maintenance.
Deductible property taxes fall under the state and local taxes (SALT) category. Taxpayers who itemize can deduct a maximum of $10,000 per household annually for all combined state and local taxes, including property, income, and sales taxes. Your timeshare property tax deduction is subject to this overall $10,000 cap.
Other fees associated with timeshare ownership are not deductible for personal use. Annual maintenance fees for upkeep and amenities are considered personal expenses. Special assessments for repairs or improvements are also non-deductible personal expenses.
Tax Treatment When Selling or Renting
Income from renting your timeshare must be reported to the IRS on Schedule E. When you report rental income, you can also deduct certain expenses associated with the rental period. These can include a pro-rated portion of your maintenance fees, property taxes, and commissions paid to a rental agent.
If the property is classified as a residence based on the personal use test, your rental expense deductions are limited to the amount of rental income you received; you cannot claim a rental loss. If you rent the property for 14 days or fewer during the year, you are not required to report the rental income or deduct any rental expenses.
The tax outcome of selling a timeshare depends on whether you have a gain or a loss. If you sell the timeshare for more than your adjusted basis (your original cost plus capital improvements), the profit is a taxable capital gain reported on Form 8949 and Schedule D. However, it is more common for owners to sell a timeshare at a loss.
When a timeshare used for personal purposes is sold at a loss, it is considered a non-deductible personal loss. This loss cannot be used to offset other income or capital gains. You may still receive a Form 1099-S and will need to report the sale on your tax return to show the transaction resulted in a non-deductible loss.