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27 J. Real Est. Tax'n 301, 2000 WL 1679004 (W.G.&.L.) Real Estate Taxation
Summer, 2000
*301 TAXATION OF TIMESHARES - ACQUISITION, USE, AND DISPOSITION ISSUES
Caroline K. Craig, Suzanne M. Luttman [FNa1]
Copyright © 2000 RIA Group; Caroline K. Craig, Suzanne M. Luttman While the purchase of a timeshare interest in a vacation property can be relatively straightforward, there
are many tax issues associated with timeshare ownership that prospective buyers, current owners, and
tax advisors may overlook. From their origins in the ski resorts of the French Alps in the 1960s, timeshare ownership interests in
vacation properties have now become the fastest-growing segment in the travel industry. [FN1]
Timeshare interests permit owners to use vacation properties for a designated period each year in
exchange for a purchase price plus a yearly fee. Today, more than two million U.S. households own
timeshares in vacation properties throughout North America. The recent growth in timeshare ownership is
likely to continue, in large part because of demand fueled by aging baby-boomers with more disposable
income and leisure time. The timeshare industry has also benefited from the participation of well-known
hoteliers, including Four Seasons, Hilton, Hyatt, Marriott, Regent, and Ritz-Carlton.
While the purchase of a timeshare interest in a vacation property can be relatively straightforward, there
are many tax issues associated with timeshare ownership that prospective buyers, current owners, and
tax advisors may overlook. This article discusses tax implications associated with the acquisition, use,
and disposition of timeshare ownership interests. [FN2] Case law and tax-planning opportunities are also
reviewed. *302 What is a Timeshare Interest? Timeshare interests most often exist in one of three forms: (1) fee simple ownership interests in
underlying real estate--the most common ownership form in the U. S.; [FN3] (2) lease arrangements
that permit ownership rights for a specified period ("right to use"); or (3) "point" system, whereby
purchasers buy points rather than an interest in an underlying condominium or timeshare unit (e.g.,
Disney Vacation Club). The first type of timeshare interest includes a deed to the property that captures
all attendant rights to deeded ownership (e.g., title and title insurance protection, right to rent, assign,
sell, contribute, bequeath, or otherwise transfer interest to a third party). In contrast, under a lease
timeshare arrangement, ownership rights may exist, but only for a stipulated period, after which the
developer secures title to the property. Point systems are frequently structured as right-to-use lease
arrangements with a definitive expiration date. This article focuses on tax issues associated with
acquisition, use, and disposition of deeded timeshare interests, since deeded interests are the most
common ownership form in the U.S., with nearly 80% of all timeshares being sold in that manner. [FN4]
In most timeshare developments, deeded timeshare interests are sold in one-week increments.
Therefore, to be "fully occupied," a given unit will typically be sold for 50 one-week intervals, allowing
two weeks for maintenance. [FN5] Acquisition of Timeshare Interests Many factors influence whether ownership of a timeshare interest will be a positive experience, including,
for example, cost of the timeshare interest, owner's overall financial situation, type of interest being
acquired, timeshare location and amenities, expectations of owner(s), and ultimate purpose for which the
timeshare interest is acquired. All prospective buyers should perform a careful assessment of both the
financial and non-financial aspects *303 associated with timeshare ownership. [FN6] A listing of key
timeshare selection criteria is presented in Exhibit 1 below. Exhibit 1 Factors affecting choice of vacation home and choice of resort 1. Frequency, timing, and duration of vacations.
2. Desire to return to the same place each year.
3. Hobbies (fishing, skiing, sight-seeing, shopping, surfing, night life, hiking).
4. Family size (and size of unit).
5. Cost of timeshare and alternatives.
6. Exchange network.
7. Ability to plan vacations in advance (particularly if interested in an exchange).
8. Resort location (proximity to transportation, health care, grocery stores, activities).
9. Unit location within resort.
10. Resort rating. 11. Financial health of project.
12. Developer (and whether developer will have a long-term interest in the property).
13. Management organization (if different from developer).
14. Maintenance cost (and changes therein over the past 5-10 years) and coverage.
15. Existence of amenities and whether additional fees are charged for use (pool, tennis courts, etc.).
16. Taxes.
17. Occupancy (number of people allowed per room, number of owners per unit, number of units per
building).
18. Rental and resale services.
19. Financing.
20. Weather.
21. Adequate reserves for maintenance and replacement.
22. If not yet constructed, infrastructure issues (roads, utilities). When contemplating the purchase of a timeshare interest, it is important that a prospective buyer
understand how the purchase agreement *304 establishes his or her use of the timeshare unit. Most
purchase agreements establish the use of the timeshare interest in one of four ways: (1) fixed time
(owner has the use of the unit for the same period each year); (2) floating time (owner and developer
use a reservation system to determine the period of use); (3) open use (owner can use the unit anytime
it is available, not to exceed the owner's allotted usage time); or (4) point system (owner can trade in
"points" to establish usage). [FN7] The tax treatment associated with acquisition, use, and disposition of
deeded timeshare interests is the same regardless of the usage arrangement.
When contemplating a timeshare purchase, it is also advisable for prospective buyers or their advisors to
estimate the annual after-tax cost of owning the timeshare interest. This type of calculation is helpful in
(1) deciding whether the prospective buyer can afford the timeshare interest and (2) comparing different
timeshare interests to determine the "fairness" of the pricing structure. [FN8] In new timeshare
developments, it is estimated that 50% to 60% of the timeshare purchase price reflects developer
marketing costs (e.g., advertising, sales commissions, brochures, free meals, and accommodations for
prospective buyers). For that reason, it is advisable that all prospective buyers investigate the timeshare
resale market since substantial discounts may be available relative to the pricing structure offered by the
developer.
When comparing the annual after-tax costs of different timeshare interests, prospective buyers or their
advisors need to be sure that the usage arrangement, location, unit size, basic amenities, and other
items are comparable or reasonably so. Sample calculations of the annual after-tax cost of a deeded
timeshare interest (for both cash and financed purchases) are included in Exhibit 2 below. For purposes
of the examples, it is assumed that the timeshare interest is purchased strictly for personal use. Such an
assumption yields the most conservative after-tax estimates. As indicated in Exhibit 2, the deductibility of
mortgage interest expense (if any) and property taxes can meaningfully affect the annual after-tax cost
of the timeshare interest. For purposes of the after-tax cost calculations, information concerning the
estimated property tax component can be obtained from the timeshare broker. Details concerning the
circumstances under which interest expense incurred to purchase timeshare interests and property tax
payments are deductible are provided in the next section. *305 Exhibit 2 After-tax annual cost of timeshare acquired for personal use [FNa1]
[FNa1]. Analysis adapted from Espinoza, "Are Two Homes Better Than One?" Money, (August 1999),
p.102.
Fact Pattern:
• In January Year 1, Taxpayer X purchased a deeded timeshare interest at a vacation resort permitting
four weeks' use any time during the year (i.e., floating-usage arrangement) for $50,000 ($12,500 per
week). Taxpayer X paid $20,000 down and financed the remainder with a $30,000 mortgage over seven
years. Assume a 31% marginal tax rate and a mortgage interest rate of 10.25%.
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Cash Purchase / Financed Purchase
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Annual expenses:
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1. Mortgage payments $ -0- $6,023
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2. Real estate taxes 280 280
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3. Association fees 1,200 1,200
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4. Total annual expenses $1,480 $7,503
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Annual federal income tax savings:
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5. Mortgage interest -0- 2,950
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6. Real estate taxes 280 280
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7. Total tax-deductible expenses (5 + 6) 280 3,230
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8. Tax savings (7 x marginal tax rate) 87 1,001
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9. Annual after-tax outlay (4 - 8) $1,393 $6,502
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Finally, prospective buyers who are considering financing their timeshare acquisitions should realize that
many mortgage lenders prefer not to make loans on timeshare interests, since the value of these
interests can be unstable and highly dependent on property maintenance and overall market conditions.
If a mortgage is obtained to finance the timeshare acquisition, the interest rate will likely be higher than
the rate charged on a traditional mortgage obtained to finance the acquisition of a primary residence.
Many prospective buyers will likely find that one of the easiest sources of financing for timeshare
acquisitions is through the property's developer. Most timeshare interests are financed over a five- to
ten-year period. *306 Use of Timeshare Interests The tax treatment associated with the use of timeshare vacation properties ultimately hinges on the
extent to which the property is used for personal versus rental use. One of three situations can occur in
connection with the use of timeshare properties: (1) timeshare interest is used for personal purposes
(personal-use property), (2) timeshare interest is used for both personal and rental purposes (mixed-use
property), or (3) timeshare interest is used for rental purposes (rental-use property). [FN9] As discussed
in greater detail below, fewer deductions are permitted to owners who use timeshare properties for
personal purposes. Mixed-use properties--those used for extensive personal and rental use--give rise to
the most complex tax treatment. The greatest opportunity for deductions rests with timeshare properties
that are rental property for tax purposes. However, in practice and as discussed below, few timeshare
interests can actually qualify for rental-property status. Both the Code and Regulations provide guidance
concerning tax issues associated with the use of timeshare properties. Exhibit 3 summarizes these issues
and the usage discussion that follows.
Section 280A governs the tax treatment of "vacation homes," which can include deeded interests in
timeshare real estate properties. By definition, the typical timeshare interest in real property cannot
qualify as a taxpayer's "primary residence" for tax purposes, since a given taxpayer is permitted
contractual use of the property for only a portion of the year, usually a few weeks. Accordingly, the
vacation-home rules of Section 280A govern the tax issues associated with the use of most timeshare
arrangements. Personal-use timeshare interests The tax treatment is quite straightforward for taxpayers who own timeshare interests and use them
exclusively for personal purposes. Only qualifying mortgage interest expense and property taxes are
deductible in connection with personal-use timeshare property. No deduction is available for other
expenses including utilities, repairs and maintenance, and depreciation. Interest expense paid or accrued
on outstanding indebtedness incurred to buy the timeshare may be deductible as "qualified residence
interest" under Section 163(h)(3) provided: (1) the timeshare interest is considered a
*307 Exhibit 3
Tax Treatment Associated with Timeshare Use Personal-use Mixed-use Timeshare Rental-use Timeshare
Timeshare
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1. Criteria (1) Unlimited (1) Rented at FMV for (1) Rented at FMV for
personal 15 days or more/year 15 days or more/year,
use, and and and
(2) Rented at (2) Personal use (2) Not used for
FMV for less greater of personal use for more
than 15 than greater of
days/year
for all unit
owners
combined
(a) 14 days/year or (a) 14 days/year or
(b) 10% of rental (b) 10% of rental
days days
for all unit owners for all unit owners
combined combined
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2. Rental No Yes (Form 1040 - Yes (Schedule E)
income Schedule E)
recognized?
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3. Deductible Yes Interest Yes - allocation Yes, allocation between
expenses? and property between rental and rental and personal
taxes personal use required use required
(1) Rental expenses (in ( 1) Rental expenses (in
order) order)
(a) Interest and (a) Interest and
taxes taxes
(b) Expenses not (b) Expenses not
affecting basis affecting basis
(e.g., utilities, (e.g., utilities and
maintenance) maintenance)
(c) Expenses (c) Expenses
affecting basis affecting basis
(e.g., depreciation) (e.g., depreciation)
(2) Personal Expenses - (2) Personal expenses -
Interest and taxes taxes
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4. Type of Itemized (1) Rental expenses - (1) Rental expenses -
expense deductions deduction for AGI deduction for AGI
deduction (Form 1040 - (Schedule E) (Schedule E)
Schedule A)
(2) Personal expenses (2) Personal expenses
(a) Interest - Taxes - itemized
itemized deduction deduction (Schedule
(Schedule A) assuming A)
second residence
(b) Taxes-itemized No interest deduction
deduction (Schedule since not a second
A) residence
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5. Rental No No, but excess rental Yes, but may be limited
loss deductions may be by passive activity
permitted? carried over to loss rules, hobby
future years loss rules
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*308 second residence, [FN10] and (2) the taxpayer's aggregate acquisition indebtedness to purchase
primary and secondary residences does not exceed $1 million. Interest paid or accrued on a home equity
loan used to purchase a timeshare property may also be qualified residence interest, provided the home
equity loan used to purchase the timeshare does not exceed $100,000. [FN11] If a timeshare property is
purchased with a consumer loan obtained through a bank or credit union, for example, none of the
applicable interest expense is deductible for federal income tax purposes. [FN12] Finally, any points paid
to secure a qualified mortgage in connection with the purchase of a timeshare interest are deductible
ratably over the life of the loan. [FN13]
In addition to potential interest deductions, taxpayers who use timeshare properties exclusively for
personal purposes may also deduct the applicable portion of any annual fee directly attributable to the
payment of real property taxes under Section 164(a)(1). [FN14] Typically, the timeshare management
group conveys this information to each owner as part of an annual statement. [FN15] To the extent
available, both the interest and tax payments are taken as deductions from adjusted gross income (AGI)
and reported on Schedule A (Itemized Deductions) of Form 1040. [FN16] The tax benefit associated with
interest and property tax deductions for timeshares may be reduced for high-income taxpayers if they
are subject to the itemized deduction phase-out as required by Section 68(a) or the individual alternative
minimum tax (AMT) imposed under Section 55.
On occasion, timeshare owners may rent out their units for a few days each year. While rental income
can help defray the cost of timeshare ownership, *309 it can also complicate the timeshare owner's tax
situation. Under Section 280A(g), vacation properties rented at fair market value (FMV) to an unrelated
party for less than 15 days per year are considered used for personal purposes. If the property is rented
for less than 15 days per year, no rental income is reported for tax purposes, and no expenses directly
associated with the rental activity are deductible (i.e., no deduction for utilities, repairs, maintenance,
depreciation, etc.). This tax treatment is often referred to as the "tax-free rent rule." Few timeshare
owners are likely to qualify for the tax-free rent situation since Section 280A(g) determines compliance
with the less-than-15-days per year rental requirement based on the number of rental days for the
entire "dwelling unit," not a given timeshare owner's portion of the unit. Accordingly, for a given
timeshare owner to qualify for the tax-free rent rule, all owners of a given unit must rent out the unit for
less than 15 days per year combined. Consequently, if a given timeshare owner uses his or her
timeshare property for personal purposes, and derives rental income from the property during the year
but does not qualify for tax-free rent under the 15-day rule, the timeshare is likely to be classified as
"mixed-use property" for tax purposes, resulting in a significantly more complicated tax profile for the
timeshare owner. Mixed-use timeshare interests Under Section 280A, vacation properties, including timeshare interests, rented at FMV to an unrelated
party for 15 days or more per year and used for personal purposes for more than the greater of: (1) 14
days per year or (2) 10% of the total days rented, are mixed-use properties. When determining the
rental and personal use of a timeshare interest for purposes of the 15-day and 14-day/10% cutoffs, the
use of all owners of a given timeshare unit must be combined under Section 280A(d)(2)(A), and Prop.
Regs. 1.280A-3(f)(3) and (4). [FN17] Mixed-use timeshare properties--those used for extensive personal
and rental use--give rise to the most complex tax treatment. When a timeshare interest is classified as
mixed-use property, owners are (1) required to allocate expenses between personal and rental use and
(2) prevented from deducting a loss in connection with the rental activity. These restrictions exist to
prevent owners from converting what are otherwise personal expenses into deductible business expenses.
The process that must be used in allocating expenses between personal and rental use for mixed-use
timeshare*310 properties is delineated in Prop. Reg. 1.280A-3(f)(5). Under the Regulations, timeshare
owners must allocate their expenses based on the mix of combined personal and rental use by all owners
of a given unit during the year. Consequently, the intended result of such an allocation scheme is to
have all owners of a given unit allocate expenses between personal and rental use in the same manner
for a given year (e.g., 40% rental, 60% personal for all owners). In practice, however, it may be difficult
to obtain information about the personal and rental use of all owners of a timeshare unit during the year,
particularly for timeshare interests that are part of a large development. Therefore, in the absence of this
information, a reasonable approach is to allocate expenses between personal and rental use based on a
given owner's personal and rental use percentages for the year (e.g., two weeks rented, two weeks
personal use by a given owner results in a 50/50 allocation). [FN18] Of course, the percentages used in
allocating expenses between personal and rental use will likely vary from year to year for a given
timeshare owner.
Once the allocation percentages are established, the expenses allocated to rental use must be deducted
against rental income in a particular order as required by Prop. Reg. 1.280A-3(d). The allocable portion of
expenses attributed to rental use must be offset against a timeshare owner's rental income in the
following order: (1) expenses otherwise deductible independent of the rental activity (i.e., qualifying
mortgage interest and property taxes); (2) expenses attributable to the rental activity that do not result
in an adjustment to the property's basis (e.g., advertising, utilities, repairs and maintenance,
commissions paid for the collection of rent, insurance premiums, etc.); and (3) expenses attributable to
the rental activity that result in a basis adjustment (i.e., depreciation). In total, the allocable portion of
expenses attributed to the rental use cannot exceed the rental income for the year (i.e., no rental loss
deduction available per Prop. Reg. 1.280A-3(d)(1)). The ordering process associated with rental-use
expenses combined with the no-loss restriction makes it less likely that timeshare owners can deduct
*311 expenses other than interest and taxes, such as depreciation. Any expenses allocable to rental use
that are not deductible in the current year may be carried over for future use against subsequent rental
income, under Section 280A(c)(5).
Rental income from a mixed-use timeshare property and the allocable portion of expenses attributed to
rental use are reported on Schedule E (Supplemental Income and Loss) of Form 1040. The portion of
property taxes allocated to personal use (as opposed to rental use) may be taken as an itemized
deduction on Schedule A without restriction. The portion of mortgage interest allocated to personal use
may be taken as an itemized deduction on Schedule A provided the timeshare owner's personal use is
sufficient to have the timeshare qualify as a second residence (i.e., personal use exceeds the 14-
day/10% cutoff). According to Temp. Regs. 1.163-10T(p)(3)(iii) and (p)(6), to be able to deduct the
personal-use portion of mortgage interest, the requirement that personal use exceed the greater of 14
days or 10% of rental days is determined using only the timeshare owner's rental days, not the
combined rental days of all owners of a given unit. [FN19]
Exhibit 4 below provides a detailed example of the allocation of expenses between personal and rental
activities for a mixed-use timeshare property. The example assumes that a timeshare owner rents the
timeshare unit for one week during the year and uses the timeshare for personal purposes for three
weeks during the year. In addition, the example assumes that 84% of the timeshare purchase price is
allocated to buildings (depreciable over 27.5 years) and 16% is allocated to the underlying land
(nondepreciable asset). No significant value is assigned to timeshare furnishings. [FN20] As the example
illustrates, all expenses must be allocated between personal and rental use, rental-use expenses must be
deducted in the proper order, and no loss may result from the rental activity for mixed-use timeshare
property. Under Section 280A(c)(5), excess deductions not available in the current year because of the
no-loss rule may be carried over and used in future years to the extent that rental income exceeds
current year rental expenses. The example also indicates that the personal-use portion of interest and
taxes may be taken as itemized deductions. *312 Exhibit 4 Expense Allocation Example for Mixed-Use Timeshare Property Fact Pattern:
• In January Year 1, Taxpayer X purchased a deeded timeshare interest at a vacation resort permitting
four weeks use any time during the year (i.e., floating usage arrangement) for $50,000 ($12,500 per
week). Taxpayer X paid $20,000 down and financed the remainder with a $30,000 mortgage at 10.25%
over seven years.
• Of the $50,000 purchase price, $42,000 is allocated to Taxpayer X's share of the buildings, and $8,000
is allocated to Taxpayer X's share of the underlying land.
• In Year 1, Taxpayer X used the timeshare unit personally for three weeks (21 days) and rented the
unit for one week (seven days) for a weekly rental of $1,400. Total rental days for all owners of the unit
were in excess of 15 days for Year 1. Taxpayer X paid the resort management group a $135 fee for
arranging the rental.
• Taxpayer X also paid an annual maintenance fee of $1,200, with $280 of the fee attributed to
Taxpayer X's share of real property taxes. For Year 1, Taxpayer X's annual mortgage interest expense
was $2,950, and utilities and maintenance costs associated with the four-week usage period were $600. Allocation: Rental Personal
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Rental income, net of rental fee Form 1040 Form 1040
Expenses: Schedule E Schedule A N/A
$1,265
(1) Mortgage interest -- Note 1 738
($2,950 x 7/28 days)
($2,950 x 21/28 days) $2212
Property taxes
($280 x 7/28 days) 70
($280 x 21/28 days) 210
(2) Utilities and maintenance
($600 x 7/28 days) 150 Note 2
(3) Depreciation 307 Note 2
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($42,000 x .03485 x 7/28
days) Note 3
Net income/loss from rental $ 0
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Notes: 1. The interest and property tax allocation reflects the IRS-approved
approach (page 310, note 18). Also, allocations are made using
taxpayer's personal/rental use percentages, not personal/rental use
percentages of all owners since, in practice, such information is
difficult to obtain.
2. Utilities, maintenance, and depreciation expense attributed to the
personal-use portion of the timeshare interest are not tax
deductible.
3. Depreciation expense for the rental-use portion is calculated
using 27.5 year Modified Accelerated Cost Recovery System (MACRS)
life, straight-line method, mid-month convention, but limited to $307
because of the "no loss" rule for mixed-use property. *313 Rental-use timeshare interests Under Section 280A, vacation properties, including timeshare interests, which are rented at FMV to an
unrelated party for 15 days or more per year and are not used for personal purposes for more than the
greater of: (1) 14 days per year or (2) 10% of the total days rented, are rental-use property for tax
purposes. If the above criteria are met, then all rental income from the property must be included in the
taxpayer's gross income for the year and all eligible expenses attributable to the taxpayer's rental activity
(including interest, taxes, utilities, repairs, maintenance, and depreciation) may be taken as deductions
from gross income, even if a loss from the rental activity results for the year. Interest expense
attributable to personal use of the timeshare is not deductible, since the timeshare does not qualify as a
second residence under Section 280A(d) (i.e., to qualify as a second residence, personal use must be
more than the greater of 14 days or 10% of rental days). Unlike personal interest expense, property
taxes attributable to the personal-use portion of a rental-use timeshare are deductible as an itemized
deduction since there is no requirement that personal use exceed a threshold to deduct real property
taxes.
In practice, few timeshare interests are likely to qualify for rental-use tax treatment, since Section
280A(d)(2)(A) and Prop. Reg. 1.280A-3(f)(3) stipulate that the 14-day/10% cap on personal use must
consider not only the personal use of the taxpayer and his or her family, but also the personal use of "...
any other person who has an interest in such unit...." Accordingly, in determining whether a timeshare
unit has been used for personal purposes for not more than the greater of 14 days per year or 10% of
the rental days for the year, the personal use of all owners of a given unit must be combined. [FN21] In
the instance of a given timeshare owner who derives rental income from the property, but the combined
personal use of all owners of the unit exceeds the 14 day/10% cap, the timeshare interest is classified as
mixed-use property and subject to the limitations discussed above.
Finally, in the unlikely event that a timeshare interest meets the criteria for classification as rental-use
property, certain restrictions exist to limit the deductibility of losses otherwise generated from the rental
activity during the tax year. [FN22] In particular, the passive activity loss rules of Section 469 and *314
the hobby loss rules of Section 183 can limit the deductibility of losses stemming from a rental-use
timeshare property. [FN23] The passive activity loss rules limit the deductible loss to the extent of the
taxpayer's passive income for the year (i.e., passive income from rental activities, limited partnership
interests, etc.). [FN24] Any unused passive loss is carried over to future years and is deductible against
passive income generated in those tax years, provided the taxpayer continues to own the timeshare
interest. The hobby loss rules may also apply to limit the deductible loss stemming from a rental-use
timeshare if the taxpayer is not engaged in the rental activity for profit. Under Section 183(d), a
taxpayer is presumed engaged in the activity for profit if the activity resulted in a profit in at least three
of five consecutive years. [FN25] Other Usage Issues Several other tax issues also relate to the usage of timeshare interests. First, the classification of a
timeshare interest as personal-use, mixed-use, or rental-use property can change from year to year,
depending on the combination of personal- and rental-use days for the year. Consequently, the tax
treatment associated with use of a timeshare interest can vary from year to year accordingly. As
discussed previously, the two most likely usage classifications for timeshare interests are as personal-use
or mixed-use property. Therefore, it is possible for a timeshare interest to be classified as mixed-use
property in one year and personal-use property in another because of extensive rental and personal use
in one year but not another. For the reasons discussed above, it is unlikely that most timeshare interests
would be classified as rental-use property. If the classification of a timeshare interest varies from year to
year, it is important for owners or their advisors to track any *315 depreciation allowed in connection
with the mixed-use classification. Of course, such depreciation, when available, reduces the owner's
adjusted basis in the timeshare interest, and therefore affects the gain or loss (if any) on disposition.
Second, on occasion, and particularly for older developments, timeshare owners may be assessed a flat
fee, payable either as a one-time payment or as annual payments spread over several years, for major
repairs or upgrades to the timeshare property. Timeshare owners may have the right to approve special
assessments in advance. Such an assessment is not deductible as an expense in the year of payment,
but rather is a capitalized expenditure that increases the timeshare owner's tax basis in the timeshare
interest. In addition to special assessments, the portion of any annual maintenance fee paid by a
timeshare owner and allocated to capital reserves or used for capital improvements also increases the
taxpayer's basis in the timeshare interest. Ultimately, these basis increases may be recoverable either
through future depreciation, if the timeshare owner meets the usage requirements discussed previously,
or on sale of the timeshare interest.
Third, and finally, most large timeshare developments permit timeshare owners to participate in a
"timeshare exchange" program. The two largest timeshare exchange programs are run by Resort
Condominium International and Interval International. Membership in these exchange programs entitles
participants to "trade" their timeshare usage, i.e., the owner of a timeshare interest can exchange his or
her "week" for a week's use of an equivalent unit in another location. An annual, nondeductible
membership fee (roughly $100) plus a nondeductible per-exchange fee (roughly $100) must be paid to
the exchange program to participate. Of course, such exchange programs give timeshare owners
considerable flexibility with respect to vacation alternatives. No income must be recognized for tax
purposes by a given timeshare owner who participates in an exchange program and uses a different
timeshare property, since the timeshare owner's economic position remains unchanged. [FN26] Disposition of Timeshare Interests Taxpayers who own deeded timeshare interests have the right to dispose of the interests in any manner
they choose. As discussed below and summarized in Exhibit 5, the tax treatment associated with
disposition of timeshare interests depends on the type of disposition undertaken by the taxpayer. *316 Exhibit 5 Tax treatment of timeshare dispositions
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Method of Tax treatment
disposition
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Sale of Losses on personal use asset not deductible, gains taxed at
personal-use preferential capital gains rate.
timeshare
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Sale of • Personal-use portion - losses nondeductible, gains taxed at
mixed-use preferential capital gains rate.
timeshare
• Rental-use portion - net Section 1231 losses deductible as
ordinary losses, gains taxed at preferential capital gains
rate assuming no depreciation recapture.
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Sale of Net Section 1231 losses deductible as ordinary losses, gains
rental-use taxed at preferential capital gains rate assuming no
timeshare depreciation recapture. Previously disallowed passive
activity losses used to increase loss or reduce gain on
disposition.
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Gift • Gift tax assessed on donor if gift exceeds $10,000 per
recipient, $20,000 per recipient if gift splitting elected.
• Recipient takes donor's adjusted basis in the property
(increased by any previously disallowed passive activity
losses) for purposes of gain calculation on disposition by
recipient.
• Recipient takes as basis fair market value on date of gift
for purposes of loss calculation on disposition by recipient
if property had declined in value when held by donor.
• For transfers between spouses, including transfers pursuant
to divorce, recipient spouse takes a carryover basis.
-------------------------------------------------------------------------------------------------------------------------------------------
Bequest • Included in estate of decedent, possibly subject to estate
tax.
• Beneficiary gets fair market value at date of death (or
alternative valuation date) as basis in property.
-------------------------------------------------------------------------------------------------------------------------------------------
Charitable Deduction equal to FMV on date of gift, less ordinary income
contribution otherwise recognized on sale (i.e., depreciation recapture).
-------------------------------------------------------------------------------------------------------------------------------------------
Foreclosure • Ordinary loss deduction if rental use elevated to trade or
business.
• Nondeductible capital loss if personal use.
• Gain recognized if mortgage balance exceeds basis.
-------------------------------------------------------------------------------------------------------------------------------------------
Abandonment Loss not deductible.
------------------------------------------------------------------------------------------------------------------------------------------- *317 Sale of timeshare interest Clearly, the most common type of disposition involves sale of a timeshare interest to an unrelated party.
It is well recognized in the timeshare marketplace that owners should not expect significant appreciation
or returns on their timeshare interests. [FN27] In fact, because of the loosely knit resale market and the
high cost paid by owners to acquire their timeshare interests, many owners actually incur losses on sale
of their interests. Some timeshare developments offer resale programs to assist owners in the sale of
their interests, charging a commission (often approaching 30%) for brokering the sales transaction. In
addition, there are real estate brokers who specialize in the sale of timeshare vacation properties. It is
often recommended that, before listing a timeshare property for sale, owners take note of the
commission to be charged, whether any long-term exclusive listing arrangements are included in the
contract, whether references are available from previous sellers, what percentage of listings are actually
sold, and what the average ratio of sales price to asking price is on past sales. As an additional
precaution, it is also recommended that timeshare sellers refrain from paying an advance fee for
brokering the sale since some owners have been unable to sell their interests despite payment of an upfront
fee. [FN28] Finally, the Internet now provides new, non-traditional opportunities for timeshare
owners to dispose of their interests. Several auction sites, including eBay.com, Amazon.com, and
Yahoo.com accept timeshare interests for sale. The Timeshare Users' Group (timeshare-users-group.com)
and the American Resort Development Association (arda.org) also facilitate timeshare sales.
When a timeshare interest is sold, the owner's gain or loss for tax purposes is calculated by subtracting
the adjusted basis of the interest from the selling price, net of commission. The adjusted basis consists
of the property's original cost (including acquisition costs) plus any assessments or fees for capital
improvements paid during ownership, less any depreciation taken on the property. The resulting
treatment of the gain or loss depends on whether the timeshare interest is classified as personal-use,
mixed-use, or rental-use property at the time of sale. [FN29] For a personal-use timeshare interest, any
realized loss on sale is nondeductible for tax purposes*318 since the timeshare interest is a personaluse
capital asset. Any gain realized on the sale of a personal-use timeshare interest is characterized as a
capital gain, since the timeshare is a capital asset to the owner under Section 1221. Capital gains
recognized on the sale of timeshare interests held for more than one year are eligible for the preferential
tax rate (10%/20%) on long-term capital gains. Since, by definition, a timeshare interest cannot qualify
as a principal residence for tax purposes, taxpayers are ineligible for the principal residence gain
exclusion available under Section 121 ($500,000 exclusion for married-filing-joint taxpayers).
For a mixed-use timeshare interest, the owner is disposing effectively of two assets--the personal-use
portion of the timeshare interest and the rental-use portion of the interest. Accordingly, the owner must
allocate not only the sales price (net of commissions) to the two assets on disposition, but must also
track the basis of the two assets separately. Depreciation expense, which reduces the adjusted basis of
property, may be taken in connection with rental activities, but not in connection with personal use of the
timeshare property. On disposition, the allocation of the sales price and original cost between personal
and rental uses should be performed based on the relative number of rental versus personal days during
the timeshare ownership period.
In the event that both portions of a mixed-use timeshare interest are sold at a loss, the loss on the
personal-use portion is a nondeductible capital loss. The loss recognized on disposition of the rental-use
portion of the asset is initially characterized as a Section 1231 loss, but may eventually be treated as an
ordinary loss for tax purposes, depending on the outcome of the netting process required under Section
1231. [FN30] Of course, it is in a taxpayer's interest generally to recognize ordinary losses as opposed to
capital losses since the deductibility of capital losses is restricted. If a gain is recognized on disposition of
the personal-use portion of the timeshare interest, the gain is characterized as a capital gain for tax
purposes and is eligible for the preferential tax rate on long-term capital gains, provided the timeshare
interest has been held for more than one year. Finally, in the event that the rental-use portion of the
interest is sold at a gain, the gain is initially characterized as Section 1231 gain, and may eventually be
treated as a capital gain, depending on the outcome of the Section 1231 netting process. Under limited
*319 circumstances, it is possible that certain timeshare owners may be required to characterize a small
portion of the gain recognized on sale of the rental-use portion of the timeshare interest as ordinary
income under the Section 1245 and Section 1250 depreciation recapture provisions. [FN31]
The tax treatment associated with the sale of rental-use timeshare interests is the same as the
treatment required for the rental-use portion of a mixed-use timeshare interest discussed above. That is,
in the event that a loss is recognized on sale, the loss is characterized initially as a Section 1231 loss,
and may eventually be treated as an ordinary loss depending on the outcome of the Section 1231
netting process. For rental-use timeshare interests sold at a gain, the gain is initially characterized as a
Section 1231 gain and is potentially eligible for capital gain treatment depending on the outcome of the
Section 1231 netting process. Also, as with the rental-use portion of mixed-use timeshare interests sold
at a gain, some of the Section 1231 gain may have to be recharacterized as ordinary income under the
depreciation recapture provisions of Sections 1245 and 1250.
In addition to the gain/loss treatment just discussed, sellers of rental-use timeshare interests may also
deduct on sale any previously disallowed passive activity losses incurred in connection with rental use of
the timeshare interest. These previously disallowed passive losses are available to reduce the gain or
increase the loss recognized on disposition of the rental-use timeshare interest in an otherwise taxable
transaction, as provided in Section 469(g)(1).
Finally, timeshare owners are essentially prevented from converting a personal-use timeshare property to
a rental-use property prior to sale to avail themselves of ordinary loss treatment on disposition. In the
case of such conversions, a taxpayer must use as adjusted basis the lesser of (1) the property's adjusted
basis or (2) the property's FMV at date of conversion. Consequently, for timeshare interests that have
declined in value, taxpayers must use FMV at conversion as the adjusted basis, and are therefore
prohibited from deducting losses incurred prior to conversion. *320 Gift of timeshare interest On occasion, timeshare owners may choose to dispose of their interests by making a gift of the property
to another taxpayer. In the event of a gift to someone other than a spouse, the transfer is eligible for
the $10,000 annual gift exclusion under Section 2503(b)(1) before any federal gift tax is imposed or
before the taxpayer must use a portion of his or her $220,550 unified credit amount for 2000. [FN32]
Transfers to a spouse would not be subject to any federal gift tax because of the unlimited marital
deduction available under Section 2523(a). [FN33] In the event that a donee disposes of a timeshare
interest at a gain, the donee takes a carryover basis in the timeshare interest from the donor, increased
by any previously disallowed passive activity losses. See Sections 1015(a) and 469(j)(6)(A). If a donee
disposes of a timeshare interest at a loss, the donee's income tax basis will be FMV at the date of gift if
the timeshare interest had declined in value while owned by the donor, under Section 1015(a). [FN34]
Finally, timeshare owners who seek to give away their interests to any willing taker may get information
about interested parties from the web site that facilitates such transfers: http://
timeshareusa.com/timesharedump.htm. Charitable contribution of timeshare interest Timeshare owners may also dispose of their interests by donating them to a qualified charity. Written
appraisals are required to support charitable donations in excess of $5,000. The owner is allowed a
charitable deduction for income tax purposes equal to the FMV of the interest at the time of gift, less any
ordinary income (i.e., depreciation recapture) that would have been recognized had the timeshare
interest been sold. See Section 170(e)(1). Many charities may decline to accept a timeshare donation
because of the attendant obligation to pay annual fees until the property is sold. *321 Bequest of timeshare interest For taxpayers who die owning timeshare interests, the value of such interests at the date of death
(Section 2031) or at the six-month alternate valuation date (Section 2032) will be included in the
decedent's gross estate and will be potentially subject to federal estate tax. A taxpayer who dies in 2000,
and who has not previously used any of his or her unified credit ($220,550), can transfer assets,
including timeshare interests, at death to a non-spouse or non-charity in the amount of $675,000 or less
before any federal estate tax is imposed. [FN35]
For income tax purposes, an heir who is bequeathed a timeshare interest takes the value at which the
interest was included in the decedent's gross estate as his or her basis for income tax purposes, as
provided in Section 1014. Consequently, if the timeshare interest had appreciated in value prior to the
decedent's death, the appreciation permanently escapes income taxation. If the timeshare interest had
depreciated in value prior to the decedent's death, the loss in value would be permanently "lost" and
therefore unavailable to the heirs. Similarly, if the timeshare interest had been classified as a rental-use
property during the original owner's period of ownership, any previously disallowed rental losses would be
lost to heirs to the extent that the heirs receive a stepped-up basis for income tax purposes on the
death of the original owner under Section 469(g)(2). Foreclosure on or abandonment of timeshare interest While not common, some timeshare owners may be involved in situations in which a mortgage lender
forecloses on a timeshare for non-payment of interest and principal, or the owner, because of the
inability to sell the timeshare interest, chooses to abandon the interest. In the event of foreclosure, the
best possible result for tax purposes is for the timeshare owner to take an ordinary loss deduction,
provided the owner had been engaged in rental of the timeshare sufficient to elevate the rental activity
to a trade or business. [FN36] Otherwise, in the event of insufficient rental activity, the loss would be
characterized as a capital loss and would be deductible provided the timeshare interest is not classified
as personal use. If the timeshare owner's foreclosed mortgage amount exceeds the owner's adjusted
basis in the *322 property, the owner must recognize gain on foreclosure, despite the fact that no cash
was received. The characterization of the gain depends on the type of timeshare interest.
For owners who want to dispose of their timeshare interests, but who are unsuccessful in selling their
interests, one option may be to determine if the timeshare developer will accept a "deed in lieu of
foreclosure." Such an arrangement effectively permits the owner to abandon the interest. The owner
receives no cash on disposition and no loss is deductible for tax purposes. But the owner is no longer
responsible for annual maintenance payments. While some timeshare developers prefer not to get the
timeshare interest back, the owner, through a quitclaim deed, may surrender rights to the property.
Proper legal documentation supporting the quitclaim transaction must be prepared and a recording fee
must be paid to the local recorder of deeds. Tax Planning Opportunities Since deeded timeshare interests fundamentally involve property ownership rights, the standard tax
planning strategies that apply to property transactions also apply to timeshare interests (e.g., accelerate
deductible expenses, monitor alternative minimum tax implications of transactions for high-income
taxpayers, etc.). Beyond these traditional tax planning strategies, there are also several other tax
planning issues that are of particular importance to timeshare owners. For example, in connection with
the acquisition of timeshare interests, many owners will opt to purchase the interest without obtaining a
mortgage. In the event of such an arrangement, taxpayers should consider purchasing the interest with a
credit card that carries some type of rebate privilege (e.g., frequent flyer miles, cash back). Of course,
this strategy assumes that the purchaser will not incur credit card financing charges, which are
nondeductible expenses.
As discussed previously, the tax treatment associated with the use of timeshare interests hinges on
whether the interest is classified as personal-use, mixed-use, or rental-use property. It is essential from
a tax-planning perspective for timeshare owners who rent out their units to keep meticulous records of
both rental and personal activity, as well as the related expenses. In addition, timeshare owners or their
advisors should track the adjusted basis of the timeshare property over time, adjusting for capital
improvements and depreciation. Tracking the basis calculation is particularly important for timeshare
interests classified as mixed-use property since the owner has two adjusted bases--a basis for the
personal-use portion, and a separate basis for the rental-use portion of the timeshare interest. In *323
the event that a timeshare interest is disposed of either by sale or by gift, the timeshare owner's
adjusted basis computation will affect not only the gain or loss computation on sale, but also the
carryover basis to potential donees.
In addition, timeshare owners or their advisors should be sure to track any unused (i.e., nondeductible)
rental expenses (stemming from the "no loss" rule for mixed-use property) and any carryover rental
losses (stemming from the passive activity loss limitation). These unused expenses and carryover losses
are potentially available to offset future rental income and, in the case of carryover passive activity
losses, may offset realized gain on disposition of the timeshare interest in an otherwise taxable
transaction. The excess rental expenses and the suspended passive activity losses are available to the
extent that the timeshare interest remains classified as either mixed-use or rental-use property,
respectively. For that reason, timeshare owners should manage the personal use of the timeshare
property during ownership, and particularly during the final year of ownership, to control the tax
treatment on disposition and to permit deductibility of previously disallowed expenses and losses.
Finally, some timeshare owners may operate under the mistaken belief that they can contribute one
year's use of a timeshare interest to a qualified charity (while still owning the underlying interest) and
receive a charitable contribution deduction for income tax purposes. Such "right-to-use" contributions are
nondeductible for tax purposes, as delineated in Rev. Rul. 89-51, 1989-1 CB 89. Conclusion While the purchase of a timeshare can be quite straightforward, there are many complexities associated
with timeshare ownership that may be overlooked by prospective buyers, current owners, and their tax
advisors. Having an understanding of these complexities will help make timeshare ownership an
enjoyable and potentially profitable experience, which should be a matter of interest to all current and
prospective timeshare owners. [FNa1]. Caroline K. Craig, Ph.D., CPA, is a Professor of Accounting at Illinois State University in Normal,
Illinois. Suzanne M. Luttman, Ph.D., is an Associate Professor of Accounting at the Leavey School of
Business Administration at Santa Clara University in Santa Clara, California. [FN1]. A Consumer's Guide to Vacation Ownership, American Resort Development Association,
http://www.arda.org. [FN2]. This article focuses on tax issues associated with ownership in timeshare real estate properties,
not timeshare interests in other asset types including, for example, private airplanes and yachts.
Moreover, this article does not discuss whether timeshares acquired as investments provide reasonable
rates of return. For a comprehensive discussion of investment-related concerns, readers are referred to
Ziobrowski and Ziobrowski, "Resort Timeshares as an Investment," The Appraisal Journal (October 1997),
pp. 371-380. [FN3]. Timeshare acquisitions in foreign countries typically consist of right-to-use properties since the
right to deeded ownership is restricted to citizens of the particular country in question. See Hetzer,
"Timeshares: Their Time Has Come," Business Week, 4/14/97. For example, "Mexican law prohibits
outright ownership of real property by foreigners within 50 kilometers of the coast." (Martin, "Timeshare
Dealers Could Turn Your Mexican Vacation into a Trap," San Antonio Business Journal, 7/2/99, p.28.) [FN4]. The Resort Timeshare Industry in the United States 1997: A Survey of Projects with Active
Marketing and Sales Programs, http://timeshare-users-group.com. [FN5]. Because timeshare interests are most frequently sold in one-week intervals, the term "interval
ownership" is often used to denote the property interest. [FN6]. Strauss, Time-Share Condominiums: To Buy or Not to Buy (Vantage Press, Inc., 1995); Rejnis and
Walter, Buying Your Vacation Home for Fun & Profit (Dearborn Financial Publishing, Inc., 1996). [FN7]. Many timeshare properties also permit "bonus time" usage, an arrangement whereby owners can
use unoccupied units nightly as essentially hotel rooms for a stipulated charge. [FN8]. While the range varies considerably, the average cost of a one-week, deeded timeshare interest in
the U.S. in 1997 was $10,325, with average yearly maintenance costs of $360. See note 4, supra. [FN9]. While not common, a timeshare property could also be classified as "investment property" if the
timeshare interest is neither rented nor used personally by the owners. Given such a circumstance,
interest, taxes, and maintenance costs incurred in connection with the property could be classified as
investment expenses, and potentially deductible as itemized deductions. [FN10]. Interestingly, a taxpayer who owns more than one second residence (e.g., owns three, four, or
five residences) may designate, each year, a different residence as his or her "second residence."
Mortgage interest on a timeshare property used exclusively for personal purposes may be deductible as
an itemized deduction for a given year as long as the taxpayer designates the timeshare property as the
second residence for that year. Also, multiple weeks of ownership at the same timeshare property
represented by a single deed may constitute a single residence for tax purposes. [FN11]. Under Sections 163(h)(3)(B)(ii) and 163(h)(3)(C)(ii), the $1 million limit on acquisition debt and
the $100,000 home-equity loan limit are reduced to $500,000 and $50,000, respectively, for married
taxpayers filing separate returns. [FN12]. Section 163(h)(1). [FN13]. Section 461(g). [FN14]. Any applicable portion of personal property taxes assessed by states on the value of timeshare
furnishings are also deductible under Section 164(a)(2). [FN15]. For most timeshares, the portion of the annual fee attributable to real property taxes tends to be
small. Accordingly, for most personal-use timeshares, the most significant itemized deduction resulting
from timeshare ownership is interest expense on qualified borrowings (i.e., home mortgage and home
equity loans). [FN16]. While not a routine occurrence, uninsured casualty losses associated with timeshare interests
used for personal purposes are also deductible as itemized deductions under Section 165(c)(3). [FN17]. Under Prop. Reg. 1.280A-1(e)(1), "personal use" of a timeshare property includes use by the
owner, co-owners, family members of the owner and co-owners (brother, sister, spouse, ancestor, or
lineal descendant), anyone with whom the owner exchanges use of the timeshare, and anyone who rents
the property for less than FMV. [FN18]. Over the years, considerable controversy has existed with respect to the formula used for
allocating expenses between personal and rental use for mixed-use vacation properties. In particular, the
IRS has maintained the view, consistent with Prop. Reg. 1.280A-3(d)(3)(iii), that expenses, including
interest and taxes, are to be allocated between personal and rental use based on total usage days (not
365 total available days during the year). In contrast, several court cases including Bolton, 694 F.2d 556,
51 AFTR2d 83- 305 (CA-9, 1983), ruled that mortgage interest and taxes should be allocated to rental
use based on total days in the year, thereby resulting in a smaller rental-use allocation and a larger
personal-use allocation. The more conservative approach for timeshare owners is to allocate all expenses,
including interest and taxes, between personal and rental use based on total usage during the year. [FN19]. Some taxpayers may assert that the portion of interest allocated to personal use should be
treated as investment interest expense rather than qualifying mortgage interest expense. To claim such a
deduction, the taxpayer would have to demonstrate that the timeshare was held for investment purposes
(in anticipation of appreciation) rather than for personal use. Such a position would be difficult to sustain
for most timeshares and most timeshare owners, if the timeshare interest is used personally or held for
rent. [FN20]. In practice, it will likely be difficult to obtain information that would permit an allocation of the
timeshare purchase price to furnishings. At best, most timeshare owners can reasonably expect to
allocate the purchase price between buildings (depreciable over 27.5 years under MACRS) and land (nondepreciable).
[FN21]. The requirement that personal use of all owners for a given timeshare unit be combined for
purposes of the 14 day/10% personal use cap is consistent with the requirement that the rental use of
all owners of a given timeshare unit be combined for purposes of the less-than-15-day rental
requirement for purposes of the "tax-free rent" rule discussed earlier in the article. [FN22]. Expectationally, the only way a timeshare interest would qualify as rental-use property would be
for the timeshare ownership to be divided among a small number of owners, who then agree to limit
their combined personal use to not more than 14 days per year or 10% of total rental days. This
situation is clearly not the norm for the vast majority of timeshare owners. [FN23]. For a comprehensive discussion of issues relating to the availability of loss deductions on
timeshare rental properties and restrictions relating thereto, readers are referred to Bohman and
Bohman, "The Income Tax Treatment of Vacation Homes: Interplay with the Passive Activity Loss Rules,"
16 J. of Real Est. Tax'n 218 (Spring 1989), and Poswolsky, "Understanding Vacation Home Rules," 174
Journal of Accountancy (July 1992), pp. 76-83. [FN24]. Under Section 469(i), if a taxpayer "actively participates" in the rental of the property (e.g.,
arranges for tenants, oversees maintenance, etc.), the taxpayer may qualify for the rental real estate
exception, which permits up to $25,000 per year in passive rental losses to be deducted in the current
year, even in the absence of passive income. As a related point, timeshare owners who rent their units
for a maximum of seven days per year are not engaged in a rental activity, and are therefore ineligible
for the $25,000 loss deduction (TAM 9505002 and Temp. Reg.1.469-1T(e)(3)(ii)(A)). [FN25]. See also Lukens, 945 F.2d 92, 68 AFTR2d 91-5754 (CA-5, 1991) and Ames, TCM 1990-87. [FN26]. To the extent that a timeshare owner participates in the exchange program, the use of an
owner's unit by someone else participating in the exchange program constitutes "personal use" time for
purposes of the personal use cutoffs (i.e., 14-day/10%). [FN27]. For a complete analysis, see Ziobrowski and Ziobrowski, note 2, supra. [FN28]. Some states prohibit brokers from collecting advance fees as discussed in Matas, "Time-share
Listing Fees Spark Suit," The Wall Street Journal, 3/11/98. [FN29]. When classifying a timeshare interest as personal-use, mixed-use, or rental-use at the time of
sale, taxpayers need to look to the substance of their timeshare transactions. For example, it may be
difficult for a taxpayer to sustain the position that a timeshare interest is mixed-use if there has only
been one year of rental activity immediately prior to the year of sale. [FN30]. The Section 1231 netting process requires a taxpayer, in a given year, to net out (1) gains and
losses from long-term business-use casualties and (2) gains and losses from sales, exchanges, and
involuntary conversions of Section 1231 assets. If a net Section 1231 loss results, the loss will be
treated as an ordinary loss for tax purposes. If a net Section 1231 gain occurs, the gain will be treated
as long-term capital gain, provided none of the gain has to be characterized as ordinary income under
the "lookback" provision of Section 1231(c). [FN31]. Depreciation recapture under Section 1250 would occur for timeshare owners who purchased
their interests prior to 1987 and took accelerated depreciation on the portion of the purchase price
allocated to the building. No Section 1250 depreciation recapture would be required for interests acquired
by individuals after 1986 since only straight-line depreciation is available for real property. For timeshare
interests sold after 5/6/97, some portion of the gain may have to be classified as "unrecaptured Section
1250 gain" and therefore taxed at a maximum rate of 25%. Depreciation recapture under Section 1245
would occur only on the sale of timeshare interests when a portion of the purchase price had been
allocated to depreciable furnishings with some depreciation taken. [FN32]. Married taxpayers are eligible to make the gift-splitting election under Section 2513(a)(1), which
effectively doubles the annual exclusion to $20,000 per donee. Also, the $220,550 unified credit is the
amount available for transfers occurring in 2000 under Section 2505. The credit amount is scheduled to
increase over the next five years, eventually reaching $345,800 for years 2006 and after. Also, taxpayers
or their advisors should be aware that several states impose gift taxes on gratuitous transfers and, in
some instances, state gift tax is imposed even when no federal gift tax is due. [FN33]. In the event of transfers of timeshare interests to a spouse or ex-spouse pursuant to divorce,
the transfer is not subject to gift tax. The recipient spouse takes a carryover basis in the property under
Section 1041(b)(2). [FN34]. Some modifications to these basis calculations may be necessary in some instances including,
for example, when gift tax has been paid by the donor, when the donee has made capital improvements
to the property, etc. [FN35]. Even if no federal estate tax is due, some estates may still owe state transfer taxes since not all
50 states "piggyback" directly onto the federal transfer tax system. For additional information, see Craig,
"State Wealth Transfer Taxes," 14 Journal of State Taxation 1 (Panel, Fall 1995). [FN36]. Murtaugh, TCM 1997-319.
27 J. Real Est. Tax'n 301, 2000 WL 1679004 (W.G.&.L.) END OF DOCUMENT
COPR. (C) 2006 Warren Gorham Lamont
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