Does it make sense to buy a timeshare? Negative opinions are easy to find, and there’s little doubt that high-pressure sales pitches may lead to some bad decisions.
Nevertheless, millions of Americans own timeshares. Surveys indicate that purchasers tend to be well educated, with comfortable incomes. Can so many capable and accomplished people all be wasting their money?
The answer to these questions is that timeshares can’t be crammed into a single basket and treated as a universal good or bad deal. There are an infinite number of buying opportunities, with enormous variations from one arrangement to the next. If you look at a timeshare as a big-ticket purchase rather than as an investment, and if you read the terms of the agreement carefully before making any commitment, you might decide to add a timeshare to your vacation plans. Or you might not.
Old and new
Buying a timeshare essentially means prepaying for lodging on future vacations. Originally, buyers had a fixed destination.
Example 1: Mel and Lana King bought a timeshare many years ago for $15,000. This entitled them to a two-week stay at Resort A, in Room B, at a set time period each year. This sort of arrangement might work well if the Kings wish to spend the same two weeks at the beach every year. If they change their mind, the Kings might be able to rent the room and collect a fee (depending on the contract terms); alternatively, they could let friends or relatives use their slot.
As you can see, such arrangements lack flexibility. The Kings’ circumstances might change, and the same yearly vacation plan might lose appeal. Thus, timeshare companies have sought ways to bring choice into the timeshare experience. Now, many deals involve points, rather than some sort of room swap.
Example 2: Jim and Hope Grant put $25,000 into a timeshare last year. Instead of the right to use a specific room, they purchased an annual allotment of 200 “points” in a hotel chain’s timeshare network. Each year, they can use those 200 points to stay at a vacation destination listed at 200 points on the network. One year, the Grants’ 200 points might cover two weeks in a typical resort guest room; the next year, the same 200 points could allow the Grants to stay for one week in a luxurious suite with a beautiful view. And so on.
Pros and cons
Timeshare enthusiasts express many reasons to make this choice. You’re guaranteed a place to stay on vacation, perhaps an extremely desirable one, without having to purchase and maintain a second home year-round. In a far-flung network, you might have access to some splendid vacation opportunities. Having a timeshare may force even the most dedicated workaholics to spend some time sailing or skiing. Moreover, as the timeshare promoters might say, you could be paying for tomorrow’s vacations at today’s prices.
Among their drawbacks, the financial benefits of timeshares are uncertain, to say the least. You’ll have a substantial upfront outlay, far more than the cost of vacation lodging for a year or two. If you make a partial initial payment, the seller probably will offer financing, but the interest charges might be steep. You’ll also have annual maintenance fees to pay, and perhaps some extra costs for using certain features of the plan.
Moreover, timeshares may have little or no resale value. Indeed, one strategy is to acquire a timeshare on a growing online secondary market, for a fraction of the initial price. You’ll have to pay future maintenance fees, though.
Proceed with caution
Ultimately, you should approach a timeshare as you’d evaluate any major outlay. Don’t make a snap decision, especially after hearing a persuasive sales pitch. Read the contract carefully and get answers to any questions that arise. Crunch the numbers.
Example 3: In example 2, the Grants pay $25,000 for a timeshare; each year they can use 200 points for vacations in the network. The Grants calculate that 200 points will get them around $3,000 worth of vacation lodging, at current rates. Assume the maintenance on this hypothetical timeshare is $800 a year. If so, the Grants will save $2,200 on their lodging: they’ll pay $800 maintenance instead of the $3,000 going rate.
In such a situation, it will take more than 11 years for the annual savings to justify the upfront outlay, assuming no resale value. If there were a resale value, the numbers would be much different. Our office can help you go over the numbers in a timeshare you’re considering, to help you make an informed decision.
Taxing Timeshares
- Generally, the tax benefits of putting money into a timeshare are limited.
- You may be able to deduct property tax if you itemize deductions. You’ll need to be able to identify how much of your annual maintenance goes for property tax.
- Similarly, you might be able to deduct interest, if you finance your purchase. Several rules must be followed, including: you’re not allowed to deduct home mortgage interest on more than two residences, and the loan must be secured by the timeshare you purchased.
- A loss on a timeshare sale typically is not deductible. A gain will be taxable, but favorable long-term capital gains rates apply on a timeshare held more than one year.
- Different rules apply if you rent your timeshare. Contact our office for assistance in tracking income and expenses.