Author: Leon Clinton

If you own a timeshare and use it only for personal and business lodging, you have a unique opportunity to maximize your tax benefits.

Big Benefit

The IRS allows timeshare owners who do not rent their property to claim deductions for business-related lodging without being subjected to the grim vacation-home rules.

Guidelines for Maximum Tax Benefits

1. Exclusive use for business and personal lodging. With no rental, you maintain eligibility for business and personal tax advantages without suffering from the vacation-home rules.
2. Business deductions for lodging expenses. Under IRC Section 162(a)(2), ordinary and necessary business expenses such as timeshare lodging are deductible when traveling for business.
3. Personal use. Personal use of a deeded timeshare does not qualify for business deductions, but it can qualify as a second home eligible for second-home mortgage interest deductions.

Records Strategy

Keep detailed records of your timeshare use, separating business from personal days to audit-proof your deductions and ensure compliance with IRS requirements.

Relatives

Here’s a good rule to know for timeshares: days of rental to a defined relative count as personal use days by you. In other words, the tax code does not recognize as rental days the days you rent your timeshare to a defined relative (close relatives such as parents, brothers, children).

Next Step

If you want my help examining your timeshare use, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 12, 2024

If you want to convert your home to a rental property, you can improve your tax benefits by selling it to your S corporation.

Benefits of Selling Your Home to Your S Corporation

• Tax savings on home sale profit. By selling your home to your S corporation, you can utilize the home-sale profit exclusion—up to $500,000 for married couples—to avoid taxes on gains from the sale, assuming you meet the eligibility criteria.
• Increased depreciation deductions. The transaction increases the depreciable basis of your property, resulting in higher annual depreciation deductions.

Addressing Common Doubts

• Property tax concerns. While the sale may increase property taxes due to reassessment at the current market value, the overall financial benefits from tax savings on the gain and increased depreciation often outweigh these additional costs.
• Homestead exemption. Selling your home will indeed result in losing any homestead exemption benefits. But the same is true if you convert it to a rental property. Thus, the homestead exemption is a non-issue because you lose it in either case.
• Related-party sale concerns. Although selling to your S corporation is a related-party transaction, it is legitimate under tax law. The impact for you is that the profit on the sale is subject to ordinary income treatment. But to the extent you can use your home-sale exemption against the profit, you don’t pay federal taxes on that ordinary income.

Implementation Steps

• S corporation. You have the best flexibility by creating a separate S corporation to hold your old home as the S corporation’s rental property.
• Appraisal. Obtain an independent appraisal to establish fair market value for the transaction.
• Formal procedures. Use professional services for title transfer and legal documentation to ensure the sale mirrors an arm’s-length transaction.
• Documentation. Maintain proper records and documentation to support the transaction’s validity, should the IRS ever want to examine it.

Conclusion

Selling your home to your S corporation before converting it into a rental property can offer substantial financial advantages. While there are considerations such as increased property taxes and the loss of the homestead exemption, the potential tax savings and increased cash flow typically provide a net positive outcome.

If you want to explore this strategy with me, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 10, 2024

The IRS in its repair regulations gives you a partial disposition election that benefits you when you replace a structural component such as a roof on your office building or rental property.

Previously, when you replaced a structural component such as a roof, the old roof’s remaining depreciation continued on your books, an ugly result. But now, say thank you to the IRS.

Beneficial Change in IRS Policy

The IRS allows property owners to elect a “partial disposition” deduction. Using this election means when you replace an old roof, you can deduct the undepreciated basis of the old roof rather than continue depreciating it. This change simplifies your financials and provides an immediate tax benefit.

Advantages of the Partial Disposition Election

1. Immediate deduction. With the election, you claim an immediate tax deduction for the undepreciated basis of the old component.
2. Beat the recapture tax. When you eliminate the old component, you avoid the capital gains recapture tax of up to 25 percent (technically known as “unrecaptured Section 1250 gain”) when you sell the property. 

Example

If you replace an old roof that initially cost $100,000 and has $40,000 of depreciation remaining, you can deduct this $40,000 immediately, rather than depreciating it over the remaining useful life.

You also avoid paying the unrecaptured Section 1250 gain tax on the $60,000 of depreciation you have already taken.

If you plan to replace a building component and want my help ensuring the best tax benefit, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 7, 2024