In this post about timeshare donation, the content was principally drawn from an article written a number of years ago by David H. McClintock, CPA for Timesharing Today. Although the article is dated back to 2001, I have found that the content sound and if nothing else a good starting point with regards possibly donating a timeshare. I have also added my own commentary throughout the article as I saw fit.
As always, this article is for informational purposes only, please consult your accountant or legal expert with regards renting, selling, donating and bequeathing your timeshare(s).
Mr. McClintock has written a number of very interesting articles on the tax implications of timeshare donation, rental and sales. I will be curating his work and submitting his articles with my thoughts interspersed.
You have decided it’s time to get rid of that timeshare week you never use or can no longer afford. Should you sell it? Or should you donate it to charity?
If you have a charity that you would like to help, by all means, donate your timeshare to that organization. However, if you want to maximize your proceeds from the disposition of your week, it will almost never make sense to donate a timeshare week.
If you sell the unit, you would recover 100% of the value as sales proceeds, less any selling costs. However, if you donate the unit, your proceeds will come from the tax savings associated with your tax deduction. If you are in a 28% tax bracket, your tax savings will be approximately 28% of the value of the unit. Thus, if you could sell your week for $5,000, you would net $5,000 before considering selling costs. But your tax savings from a donation would be only $1,400 (28% of $5,000). The price at which you can sell the unit is normally about the same “fair market value” as what your charitable deduction should be for a donation of the week.
Fair Market Value
Your tax deduction for a donation is limited to “fair market value” of the week. Fair market value is not what you paid for the week. Nor is it what the developer is currently selling weeks for. The tax concept of fair market value is the price that a willing buyer and a willing seller would normally agree to in the marketplace. Since your marketplace is the resale market, that value should be equal to or close to what you could actually sell the week for. The prices of other resales are normally the best evidence of the approximate fair market value of your week.
If you value the week (alone or combined with other non-cash donations) at more than $500, you must file Form 8283 with your tax return, putting IRS on notice that there might be a valuation issue for them to scrutinize. If you value the donated week at more than $5,000, you must get a formal appraisal. Further, if you donate more than one week in a year, you must get an appraisal if the total value of the donated weeks exceeds $5,000.
If required, the appraisal must be performed by someone who is “qualified” to do the appraisal, based on requirements set forth in the federal income tax regulations. Many charities state that they will provide a valuation statement for the donor. Beware of such an offer. If the value is over $5,000, you need a formal appraisal. Whatever the value is, you are responsible for the valuation shown on your tax return. If you significantly overstate the value of your week, there are some stiff tax penalties that can apply.
If the charitable organization disposes of the week within two years after your donation, it must file Form 8282 with the IRS and send a copy to you, disclosing the amount realized from the disposition. If the IRS doesn’t examine your return based on your required disclosures, it has another alarm that goes off if the Form 8282 shows a significant discrepancy between the donation deduction you claim and the amount realized from the charity’s disposition of the property.
We are not naive enough to believe that taxpayers don’t sometimes try to inflate the donation value used for tax purposes. However, to inflate the value enough to break even versus a sale may border on (if it doesn’t actually constitute) outright tax fraud, which can carry some significant criminal penalties. Example calculation: Assume that a week will sell for $5,000, its fair market value. In order to save taxes of $5,000 on a donation, a person in a 28% tax bracket would have to list the tax return value for that timeshare week at $17,857!
Donating the Use of a Week
Someone contemplating a timeshare donation with a resulting tax benefit should ensure that it’s the ownership of the week that is to be donated. The tax law specifically prohibits a tax deduction for donating the use of a week (e.g., donating this year’s week) to charity.
I believe this is very important as many of my clients have auctioned off the use of their week for charity events. Although it’s fine to auction the actual use of a week, it is important to realize that does not qualify as an actual taxable donation.
Some Final Thoughts
Sell the week if you are trying to maximize your profit (or minimize your loss). Donate the week only if you truly have a charitable motive or if the selling costs and headaches of selling exceed the anticipated gross sales price.
You will likely see advertisements or hear or read stories that suggest using valuations for tax purposes for donated timeshares that are much higher than the expected selling price or that are based on developer prices. Some charities tout such valuation methodology. Beware of playing roulette with high tax valuations. The stakes for you can be very high.
Whatever you do, don’t make a final decision based solely on this article. If you are considering a donation of your timeshare week, discuss it with your tax advisor. Take a copy of this article with you and ask how it applies. It’s particularly important to do so since this article does not cover all possible circumstances associated with a donation.