Q:

Subject: Sale of a Timeshare at a loss

Kerry, how do you treat the sale of a two week timeshare unit purchased in 2001 and sold in 2005 at a loss on your 1040 Federal Tax Return and also on your state tax (CA)?  Can you deduct the loss on Schedule D? I have received a Form 1099S.  The instruction there tells you that if the real estate is not your main home you must report it on Form 4797, and/or Schedule D (Form 1040).  CONFUSED!  Can you help, please.  Thank you. 

A:

The sale price definitely needs to be reported in order to match up with the 1099–S amount.  To leave it off completely will allow IRS and FTB to assume it to be 100% profit.

Which schedule you will need to use, as well as whether the loss is deductible, depend on how you have been using the timeshare. 

If you have been using the timeshare as a business property, and depreciating it accordingly on your business schedule, the sale will be reported on Form 4797 and the net loss, after accounting for depreciation recapture, will be deductible on Page 1 of your 1040.

If the timeshare was only used as a personal second or vacation residence, the sale needs to be shown on Schedule D, but the loss is not deductible or available to be used to offset other capital gains.  There has long been a double standard in the tax code making gains on the sale of personal use property potentially taxable, while denying any loss deductions for personal use property.

With other kinds of real estate, a case could possibly be made that it was acquired for investment purposes, making a loss deductible.  Since it has long been widely known that timeshares are the worst possible investment, with zero chance of resale profit, that wouldn’t fly in your case.

These have long been the rules.  Any competent professional tax advisor should be able to work with you on this.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for responding so quickly to my query re how to report the sale of a timeshare unit at a loss.  I very much appreciate it and the answer you provided. 

 

It seems that not many people are paying attention to a key new feature in the QuickBooks 2006 programs.  Twice in the past week, bookkeepers for clients have sent me QuickBooks 2006 data files in the much larger QBB format instead of the much smaller QBM format.  Here is one message that I wrote back to one of the bookkeepers.

I downloaded the file and will look it over and give my comments.

With QB 2006, please use the new Make Portable Company File feature to create a much smaller sized file (QBM) than you get when you make a QBB backup.  With this file, the QBM is only  3.3 mb, while the QBB you sent was 24 mb.  This will save us all a lot of upload and download time.

I commented on this new feature on my website shortly after the new program was released:

Backing Up Data Files
The regular QBB backup file doesn’t shrink the size as much as it used to. It used to go to about one-fifth the size of the full QBW file. The first file I worked with had a QBW of 25.4mb and a QBB of 17.0mb

They do have a new type of backup, called a Portable Company File, that you access through the File menu. It makes a file ending in QBM. With the data file I previously mentioned, it was only 3.2mb in size.

When you create a QBX Accountant’s Review copy, it was the exact same size as the QBM file.

I had also updated the instructions for sending me QB files to include this new QB 2006 feature. 

Thanks for your help.

Kerry

 

Q-1:

Subject: blog question

 

I invested in a startup S corp about four years ago.  So far there has been no income and there is still hope of getting a lucrative government contract

sometime in the future.  The company has incurred lots of expenses in trying to get it going but the tax form, K-1 shows no losses.  The accountant says

they are capitalizing everything as start up costs.  Can they take a more aggressive posture and under what circumstances? I know my loss is limited to my investment.

A-1:

There is a quite a bit of flexibility in deciding which exact costs are capitalized as pre-operations start-up costs, to be amortized in future years, and currently deductible operating costs.  All of the shareholders should consult with the corp’s tax accountant to establish a policy that you can all agree on for handling the different kinds of expenditures.

I just consulted my favorite reference, TMI’s The TaxBook, and it has a good summary of the rule that allows S corps to elect to deduct up to $5,000 of organizational costs plus $5,000 of start-up costs, with the excess amortized over 180 months.  The actual statement (on page 24-10) shows that these deductions are to be reduced dollar for dollar by the amount total start-up or organizational costs exceed $50,000.  You and your fellow shareholders should check with the corp tax accountant to see if this would apply in your case.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,  Thanks for your response.  To clarify, this business depends on getting a government contract.  Most of the dollars have been spent on

consultants and paperwork to get the contract.  These would seem to be operating costs rather than organization costs.  Could the shareholders

agree on writing these off before getting the contract?

A-2:

There is some flexibility in regard to what costs have to be capitalized and held off to be amortized against future income.  However, there are fewer options with this when you aren’t producing any income at all.  If you were making a lot of small sales while building up for the big payoff from the anticipated government contract bonanza, you would have a better rationale for deducting more as current operating costs than would be the case if the only money your business is ever expecting to ear is that future contract. 

You should all coordinate with your professional tax advisor on how you all feel comfortable in booking the various kinds of expenditures you have.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your advice.  Unfortunately you seem to agree with the company’s tax preparer.

Q:

Subject: Recapture

Hello,

I happened upon your website and was interested in what you said about the recapture tax rates.  I wanted to know one more thing on that subject:

Using a rental property as the subject for discussion, is the recapture tax rate on the amount recaptured from depreciation still 25%?  Or do we use the Long Term Cap Gains rate of 15%?

Where is that written in the IRS Tax code?

Thanks for your time

A:

Depreciation recapture has been around for decades and is accepted as part of the tax benefit concept.  Basically, if depreciation expense has been allowed or allowable to reduce your ordinary income tax, its recapture should also be subject to ordinary income taxes.

With one basic exception, all depreciation recapture is reported on Form 4797 and is subject to ordinary income tax rates.  The one main exception is straight line depreciation on Section 1250 property, which includes most kinds of real estate, which has a special federal recapture rate of 25%.  If accelerated depreciation was used, the excess over what the straight line method would have been is taxed as ordinary income.

In the sale of a rental property, it is often the case that depreciation recapture on the structure (Sec. 1250 property) is taxed at the 25% rate, while depreciation on other separately identified assets, such as appliances and fixtures (Section 1245 property) are taxed at the normally higher ordinary income tax rates.

The special 15% long term capital gain tax rate only applies to any gain remaining after accounting for the depreciation recapture.

Your personal professional tax advisor can better assess how these rules will work in your case.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks so much for your useful info.  It was quite helpful to me.