Time-share loss' deductibility varies

Tax Talk

April 03, 2007

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.

Therefore, if the time share was held for personal use (whether in whole or in part), a loss recognized on its disposition likely is not deductible.

My husband and I bought our first home in 2006. Knowing we'd have tax-deductible interest on the loan and equity line, we adjusted the withholding amounts in our paychecks to have more money in our pockets during the year rather than wait for a refund. We used a calculator at IRS.gov to determine the number of exemptions we claimed on our W-4s, but we must have done something wrong because we now owe more than $5,000. What are our options for offsetting this payout using an IRA contribution retroactively for 2006? I have an existing, traditional IRA (not a Roth) from a 401(k) rollover. It would be nice to pay some of this to ourselves.- Jane, Baltimore

You have until the filing deadline - this year it's April 17 - to make a maximum $4,000 contribution ($5,000 if you were age 50 by the end of 2006) to your Individual Retirement Account (IRA). This contribution can be taken as a deduction, but the deduction may be limited or phased out completely, depending on your income, filing status and the existence of an employer retirement plan. Also keep in mind that your eligibility to even make a contribution to your IRA hinges on the factors previously listed.

You mentioned that you purchased a home in 2006. Any real estate tax or points paid as a result would be deductible, and this could help to minimize your tax liability. You may have made certain energy efficiency improvements to your home that could generate federal and/or state income tax credits. In addition, if this is the first time you are filing Schedule A, make sure you capture all charitable contributions, state taxes paid with your returns last tax season and employee business expenses.

You normally file 1040A, head of household, standard deduction. Maryland tax based on the 1040A is filed online. You earn just over $1,500 at the beginning of the year in a slot jackpot, but can also provide a loss statement offsetting your win by the end of the year. Which tax form must or can be used, and on what lines are these amounts listed.

- Reg, Baltimore

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