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Business News/ Opinion / The different tax aspects of timeshare ownership
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The different tax aspects of timeshare ownership

When a capital asset, which is not a personal effect, is transferred, it gives rise to a capital gain, which is chargeable to tax

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

Many people have acquired timeshares in holiday resorts over the past few years. These timeshares entitle the owner to stay at a particular resort (or an alternative resort among the others run by the same timeshare company) for a particular number of days (usually a week) each year, on payment of a nominal maintenance charge. These timeshares are at times transferable to another person during the period of the timeshare, if one desires to not utilise the timeshare any longer. There is an informal market for such purchase and sale of timeshares. Further, if the timeshare owner is unable to use her entitlement of a week in a particular year, she can assign this right to some other person, from whom she could receive a compensation, and who could then use the resort instead of the timeshare owner for a week. So, are such receipts on assignment of timeshare or on permitting another person to utilise the week taxable, and in what manner?

The answers to these questions depend upon the exact nature of a timeshare. Is a timeshare a joint ownership of an immovable property? The timeshare owner merely has the right to occupy the resort for a particular number of days in each year, and is not a joint owner of the property. Therefore, a timeshare cannot be regarded as joint ownership of an immovable property, but should be regarded as a right to utilise a property for a particular period.

Is a timeshare a personal effect, and therefore not a capital asset? A personal effect is something which is closely associated with the body or person of an individual. Unlike other personal effects, such as a motor car or clothing, a timeshare does not have a close association with the body or person of an individual. Further, tenancy rights or a residential house, which are assets also for personal use and have occupancy rights attached to them, cannot be regarded as personal effects. Similarly, a timeshare, too, cannot be regarded as a personal effect. It is therefore a capital asset for income tax purposes.

When a capital asset, which is not a personal effect, is transferred, it gives rise to a capital gain, which is chargeable to tax. Therefore, when one assigns a timeshare completely to another person for a consideration, such assignment would give rise to a gain chargeable to income tax as capital gains. If the timeshare has been held for at least three years, the gains would be long-term capital gains, with the benefit of cost indexation and chargeable to tax at 20%.

When one allows another person to use one’s week for a particular year, is the amount received for permitting such usage chargeable to tax as income from house property, capital gains or income from other sources? Since a timeshare is not the same as ownership of a house property, the amount cannot be taxed as income from house property. Taxation as income from other sources would arise only in a case where the income cannot be taxed under any other head of income.

As discussed earlier, timeshare ownership is a capital asset consisting of the right to stay a certain number of days each year at a resort for a particular number of years. Therefore, if the right to stay for a particular number of days is transferred to another person for a consideration, it amounts to transfer of a part of the capital asset. Therefore, for example, if the timeshare acquired for 1 lakh entitled a person to stay for a week each year for the next 25 years, and the right for a week of a particular year is given to another person in exchange for, say 15,000, this amounts to transfer of 1/25th of the timeshare, whose proportionate cost is 4,000, for 15,000.

Of course, where one allows a friend or close relative to utilise the timeshare week without charging anything for it, there would be no question of taxation of any income. Under the tax laws, notional income cannot be taxed unless specifically provided for. Therefore, merely because one had the potential to earn certain income, one cannot be taxed on such potential income, if such income is not really earned.

If you therefore happen to sell your timeshare or your timeshare week, you need to keep in mind that you need to also discharge your income tax liability in respect of such sale.

Given that income from timeshares is taxable, can one claim a tax deduction for the cost of a timeshare? A timeshare is really an asset whose value depletes over time. Can one then claim a tax deduction each year over the life of the timeshare? Since a timeshare is meant for personal use during vacations, the cost of a timeshare would not be deductible either in the year of acquisition of the timeshare or over the period of the timeshare.

However, if the timeshare is acquired for use by employees of your own business for their vacations, the cost of the timeshare would be a business expenditure, being in the nature of a staff welfare measure. Such expenditure would be allowable on a proportionate basis over the life of the timeshare.

Gautam Nayak is a chartered accountant.

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Published: 26 Aug 2015, 08:37 PM IST
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