Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun .com's weekly tax advice column featuring three experts from the Hunt Valley accounting firm SC&H Group.
A few years ago we bought a time share. We recently sold it, at a loss, to a company that buys up time shares and that said the loss could be written off. My reading of tax information and a call to the IRS indicate that a time share is personal use property and the loss cannot be taken on taxes. The tax adviser for the company that bought the time share said that if we bought it with the idea of being able to sell it in the future at a gain (which the sales presentation indicated could be done), then the loss is deductible. Is this deductible or not?
- James, Bel Air
In general, the Tax Code allows taxpayers to claim losses and deductions so long as such losses and deductions are not excluded by another section of the code. An individual's ability to claim losses recognized is limited to those losses incurred in a trade or business or a transaction entered into for profit. Further illustrating this point, the Tax Code provides that no deduction is allowed for "personal, living or family expenses." IRS regulations provide that losses recognized upon the sale or disposition of property held for personal use are not deductible.
In order to determine whether loss recognized on the disposition of a time share is deductible, the taxpayer must consider how the time share was used and the reason it was held. If the time share was used solely for "personal" purposes (e.g., a vacation destination for the taxpayer and the taxpayer's family, friends, etc.), then the loss recognized on the disposition of the time share is not deductible. On the other hand, if the time share was purchased solely as an investment asset with the intention of turning a profit, the loss recognized on the disposition of the time share should be deductible.
In certain cases, the same asset is used for both personal and business (production of income) purposes. In such cases, IRS regulations appear to provide for an allocation of loss recognized on the disposition of the asset between the personal use and business use portions of the property. However, this regulation seems to indicate a "division" of the property in question between personal and business use portions (e.g., different rooms in a residence). On the other hand, previous court cases have held that in transactions with both personal and business elements, the personal element takes precedence.
