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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10453
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I own a 1/9fractional real estate property in California. I

Customer Question

I own a 1/9fractional real estate property in California. I paid 179,000 about 10 years ago. I received an offer of 50,000 recently. Can I deduct a loss on this investment?
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
What are the conditions necessary for the irs to do so?
Expert:  Lane replied 1 year ago.

Hi,

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Absolutely. As long as this is not personal use property for you this is a capital loss (schedule D).

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DO make sure you know your property’s tax basis before you sell ... FOr example if this was rental property the depreciation you took (or should have, will reduce the basis)

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But if this is something as simple a raw land, then you have a very straightforward capital loss.

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And with a 10 year holding period the lower long term rates will apply.

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Long-term gains and qualified dividends taxed at

  • 0% if taxable income falls in the 10% or 15% marginal tax brackets
  • 15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
  • 20% if taxable income falls in the 39.6% marginal tax bracket
  • 25% on Depreciation Recapture
Expert:  Lane replied 1 year ago.

Let me know if you have questions....

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Lane

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Expert:  Lane replied 1 year ago.

Let me known if you eed help with the reporting.

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Lane

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Your positive rating … (by clicking or touching the stars or smileys on your screen) … would be thanks enough!That’s how we’re credited for the work here.

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JD, CFP, MBA, CRPS (Providing, estate, income, & gift tax, as well as corporate planning and other fiancial advice, since 1986)

Customer: replied 1 year ago.
What is the meaning of the term personal use property. This fractional is available for our scheduled use 3 weeks of the year. We have used it ourselves for some of that time. We have also rented it to others to use. There must be some other guidelines that allow this loss with the irs. Is it considered an investment or is it real estate? Can we have more than one rental property in our real estate holdings for which deductions are taken yearly?
Customer: replied 1 year ago.
Our accountant seems to think we cannot deduct the loss. Why not?
Expert:  Lane replied 1 year ago.

OK ... assets are either personal use assets (which one can NEVER take a loss on , furniture, cars, primary residence, a second home)... or they are held for investment... which essentially means investment only.

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This is one of the largest IRS "gotcha's" out there ... you have to pay a capital gains on personal use assets but can not take a capital loss.

(There is one exception to that, and that's the exclusion of gain on PRIMARY residence ... a legislative incentive to home ownership - one of the biggest tax BREAKS out there for most)

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Here's the IRS guidance on that: http://www.irs.gov/taxtopics/tc409.html

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Further, there is the very complicated set of rules around the division of personal use vs investment use ...

You can read more about that here: http://www.irs.gov/publications/p527/ch05.html

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Based on the information you've provided, this is likely personal use property ... For example Times shares are DESIGNATED personal use.

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The tax policy... logic... behind this is that the use you have or could have of the property has a value ... THIS IS NOT THAT SAME AS BUYING A PROPERTY COMPLETELY FOR INVESTMENT AND IT'S FAILING AND YOUR TAKING A CAPITAL LOSS ON THAT

Expert:  Lane replied 1 year ago.

A timeshare is a personal use timeshare if you use it almost exclusively as a vacation getaway for yourself and your family, relatives, and friends, or you left it vacant or exchanged its use with other timeshare owners. Personal use timeshares can be rented to strangers, but for no more than 14 days per year. The majority of timeshares fall into this category. Losses from the sale of a personal use timeshare are deemed to be personal losses and are not deductible at all. End of story.

Expert:  Lane replied 1 year ago.

Rental Only Timeshares...

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A timeshare will qualify as a rental only timeshare if (1) it is rented at fair market value to unrelated parties for 15 days or more during the year, and (2) the owners do not personally use the timeshare for more than 14 days per year or 10% of the total days rented, whichever is greater.

When determining the rental and personal use days for the 15, 14, and 10% cutoffs, you must include the combined use of all the owners of the timeshare unit. The result is that personal use by any owner of a timeshare is considered personal use by all of the owners—for example, if you use your timeshare zero days, but the other owners use it 300 days, you have 300 days of personal use. This makes it virtually impossible for you to satisfy the fewer-than-15-days or 10% personal use tests. For this reason, few timeshares that are rented are classified as rental only timeshares.

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If a timeshare does qualify as rental only, losses incurred on its sale are deductible.

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Expert:  Lane replied 1 year ago.

And finally, the "Mixed Use" time share.

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A timeshare is a mixed use timeshare if (1) it is rented at fair market value to unrelated parties for 15 days or more during the year, and (2) the owners personally use the timeshare for more than 14 days per year or 10% of the total days rented, whichever is greater. Because the personal uses of all the timeshare owners are combined for these calculations, most timeshares that are rented are classified as mixed use timeshares.

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When you sell a mixed use timeshare you must treat the sale as a sale of two separate assets for tax purposes: a personal use timeshare and a rental timeshare. You allocate the sales price and tax basis between the two assets in proportion to your rental vs. personal use. You can deduct any losses you incur from sale of the rental use portion of the timeshare.

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Example: You paid $10,000 for a one-week timeshare in Hawaii that you used personally one-third of the time and rented out the rest of the time. You sells the timeshare for $4,000. You allocate $2,000 of your $6,000 loss to personal use and $4,000 to the rental use. The $4,000 is a deductible rental property loss. The $2,000 is a nondeductible personal loss.

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By the way, the tax law prevents you from converting a personal use timeshare to a mixed use or rental only timeshare before you sell it so you can deduct your losses. When you make such a conversion, the property's basis (cost for tax purposes) becomes the lesser of (1) the property's adjusted basis or (2) the property's fair market value at the date of conversion. If, as is usually the case, your timeshare has declined in value, you'll have to use the fair market value at conversion as the adjusted basis. SO, when you sell, you won't have any deductible losses.

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Example: You buy a timeshare from a developer for $10,000. When you convert it to rental use its resale value is only $4,000. You must use $4,000 as your basis for determining any loss when you sell it. You sell the property for $4,000 and realize no loss or gain.

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Expert:  Lane replied 1 year ago.

I've given you the IRS guidance on this:

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Here are some anecdotal pieces (but all accurate in my opinion)

http://www.redweek.com/resources/articles/tax-aspects-selling-timeshare

http://homeguides.sfgate.com/report-timeshare-sold-loss-58954.html

http://www.nolo.com/legal-encyclopedia/how-deduct-loss-on-timeshare-sale.html

https://ttlc.intuit.com/questions/2760944-we-lost-28-000-00-on-a-timeshare-we-owned-the-loss-exceeded-10-of-our-agi-but-i-can-t-find-anywhere-to-enter-this-into-turbotax

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What you may notice about many of these is that many start with the "teaser," line, something like, "how to take a loss on a time share," but once you read the article, you'll see that they all end up at the same place ... times shares like this, when usable by you personally, are not considered an investment for tax purposes, but rather are DEEMED "personal use."

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you MAY be able to get SOME benefit is you can make the cas that this was MIXED use, but based on your information. likely not.

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Lane

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I hope you'll rate me positively, using the stars on your screen … (that's the only way we get credit for the work here) … based on thoroughness and accuracy, rather than any good news/bad news content ... Hopefully, having all the facts will help you "see around some corners."

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Expert:  Lane replied 1 year ago.
Hi,
I’m just checking back in to see how things are going.
Did my answer help?
Let me know…
Thanks
Lane