A couple from California lost a Tax Court case on Monday over thousands of dollars in deductions relating to timeshare properties the couple owned and rented out. The couple, a Mr. and Mrs. Rundlett from California, bought their first timeshare in 2005 and owned 11 timeshares by the end of 2006.
The Rundletts would rent out their timeshares to other people. The IRS audited the Rundlett’s 2005 and 2006 tax returns after the couple showed business losses from their timeshares of nearly $20,000 for 2005 and $30,000 for 2006. Some of the expenses claimed in those years were travel expenses to resorts that were close to the couple’s home. From the Court ruling:
Ms. Rundlett explained that she would bribe her family to tour a timeshare by staying the night, usually at a lavish resort, and then going to the beach the next day. In order to get her family excited about the timeshare activity, Ms. Rundlett would “mix absolutely business with pleasure … and we added on to try to make it enjoyable for the stay.”
The IRS disallowed the travel expenses on the grounds that they were personal in nature and were not ordinary or necessary. Many of the other expenses were disallowed on the grounds that the Rundletts did not have a profit motive. The Court upheld the IRS’s positions.
Originally Ms. Rundlett’s business plan seems to have been a flyby-the-seat-of-the-pants experiment beginning when she decided to give “it a whirl” and purchase one timeshare to see how the activity went. Petitioners stipulated that they did “not have any written documents showing estimated profit calculations made prior to purchasing timeshares in 2004 through 2006.” The record shows that petitioners did not “prepare any business or profit plans, profit or loss statements, balance sheets, or financial break-even analyses” for the activity.
There is no evidence in the record that petitioners conducted the activity in a manner substantially similar to those of other comparable activities that were profitable or changed operating procedures, adopted new techniques, or abandoned unprofitable methods in a manner consistent with an intent to improve profitability.
Note that for most people, rental of a timeshare or any other piece of real estate should more appropriately be shown as rental activity on a Schedule E, rather than as business expenses on Schedule C as the Rundletts did. The Court didn’t address this issue, probably because the rules relating to deducting travel expenses and to profit motive are the same for both business and rental activities.
Click here for the full Court ruling.