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View Full Version : If you've ever rented points out, did you know you pay taxes on the income?


disneyberry
04-15-2004, 12:23 AM
<font face="times" size="+0">I'm already scared as heck to post this poll, but this topic is just eating away at me, and I can't stop wondering. Renting is such a sensitive subject already... I'm not sure how this is all going to go over... :eek:

Anyway, this year I spent a large number of hours learning about the tax laws for rental income, how to report it, and what expenses are deductable, etc. Long story short, DBF and I ended up paying about 22% taxes on the small DVC rental income we made in 2003 renting out extra points.

That was a wakeup call to me because before, I didn't really factor in the cost of income taxes on DVC rental income. I'd only vaguely recalled seeing someone mention that you have to pay taxes on it, but never thoroughly researched it until I was doing our 2003 tax returns.

It got me wondering how many occasional renters (or the controversial frequent renters) actually know that you are supposed to report it on your tax returns and pay tax on the income? And... if you did know, did you actually report it? :eek: :duck:

('Cause depending on your tax bracket, if you rented points at $10/point, after taxes you would only have made about $7 to $8.50 per point.)

To view the Poll Results without voting, click here (http://disboards.com/poll.php?s=&action=showresults&pollid=3890)</font>

Maistre Gracey
04-15-2004, 12:59 AM
Just a guess, but I bet the most common answer is missing...

Sort of. I kind of suspected, but didn't report it. Am not going to amend my old tax returns, and will not declare the income in the future.

Personally, I have never rented my points, so that is one bullet I have managed to dodge... :duck:

MG

DBBN
04-15-2004, 01:15 AM
Yes, I always knew and I will always report the income. We rented for the first time in the summer of 2003. So this tax season is the first time our accountant is dealing with income form DVC Rentals. Every point is accounted for and all income is documented.

We own multi familty housing in our community and for income tax purposes we treat all income from rental sources the same. Be it from our tenants of 20 years, from renters who stay 7 days in a 2 bedroom villa at WDW or from other DVC members when I've transferred points from my account into theirs. We have great trust in our accountant and when he says "it has to be" he means it and we listen.

We further track the expenses associated with managing the rental. Expenses include but are not limited to; dues, FedEx charges, office supplies, etc. Of course expenses offset some of the income.

Tigger1
04-15-2004, 01:17 AM
I have not rented any yet but I did suspect I would have to pay taxes. Did you know you have to pay taxes if you sale stuff at a gagrage sell. I bet they will send tax forms out to ebay sellers someday.

Tigger

pirateeast
04-15-2004, 08:00 AM
I know if I rent my points I have to pay taxes on that money, both fed and state. Now the real ? is will i report this on my taxes when i do, well i'm unsure. My best guess is alot of people know it is taxable income when they rent out their points but choise not to report it as income, same as when they sell on ebay or anyother place. The ? i don't know answer to, nor do i really wish to know, when we rent out points are we to pay the local lodgeing taxes just as any motel, hotel, resort does when they rent out rooms? My best guess is the local goverment there would say yes.



:chat:

TnRobin
04-15-2004, 08:01 AM
I believe the IRS definition of income goes similar to this....

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1)Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2)Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities; ....

You get the gist. Everything you get is taxable


Keep in mind that income is a combination of the revenues you collect and the expenses incurred. Just because you charged $10 a point does not mean that all $10 is taxable. Please seek the advise of your tax professional for additional applicability of this portion of the US Code

CarolMN
04-15-2004, 08:07 AM
I knew, but never really gave it much thought as I haven't rented out any of my points and have no plans to do so in the future.

I agree with Maistre Gracey - the most common answer is probably missing. :teeth:

dcfromva
04-15-2004, 08:44 AM
Originally posted by disneyberry
<font face="times" size="+0">I'm already scared as heck to post this poll, but this topic is just eating away at me, and I can't stop wondering. Renting is such a sensitive subject already... I'm not sure how this is all going to go over... :eek:

Anyway, this year I spent a large number of hours learning about the tax laws for rental income, how to report it, and what expenses are deductable, etc. Long story short, DBF and I ended up paying about 22% taxes on the small DVC rental income we made in 2003 renting out extra points.

That was a wakeup call to me because before, I didn't really factor in the cost of income taxes on DVC rental income. I'd only vaguely recalled seeing someone mention that you have to pay taxes on it, but never thoroughly researched it until I was doing our 2003 tax returns.

It got me wondering how many occasional renters (or the controversial frequent renters) actually know that you are supposed to report it on your tax returns and pay tax on the income? And... if you did know, did you actually report it? :eek: :duck:

('Cause depending on your tax bracket, if you rented points at $10/point, after taxes you would only have made about $7 to $8.50 per point.)

To view the Poll Results without voting, click here (http://disboards.com/poll.php?s=&action=showresults&pollid=3890)</font>

disneyberry,
Yes, you pay taxes on rental income. But, don't forget to deduct the expenses. Let's say you own SSR points... In your $10.00 per point rental scenario, you have to consider the original cost of the point. Let's say you purchased SSR at 89 per point-- (89 divided by 50 years = $1.78 per point per year). Then, you have your maint. expenses of 3.80 per point. Then, any interest expense if you financed your points. (There may be additional costs--did you use an escrow service to rent your points? Postage to send confirmation to renters, et'c) If you have no interest to consider (and no additional costs), your cost basis is $5.58 per point. So, I think $4.42 would be your income on which you would pay taxes....
-DC :ears: (glad I didn't rent any points as this looks like another tax headache :) )

bom_noite
04-15-2004, 10:14 AM
While I am not advocating cheating on your taxes - how would the IRS ever know you rented your points? The only way I can think is if you rented it to a "company" and they reported it as a business expense.

LIFERBABE
04-15-2004, 11:42 AM
If you do report rentals/transfers as income, doesnt that open up a whole new world of deductions also?

Im not disagreeing but asking.

Please consult your tax professional............but by deducting the costs of renting and the associated expenses it would pretty much be a wash. With rental income you could possibly deduct maintenance fees, Partial costs of airfare and lodging, trips to WDW for business purposes, meals, internet access or ebay fees to market your rental, etc. just like any business expense.

Would this not be the case?

dcfromva
04-15-2004, 12:15 PM
Originally posted by bom_noite
While I am not advocating cheating on your taxes - how would the IRS ever know you rented your points? The only way I can think is if you rented it to a "company" and they reported it as a business expense.
bom_noite,
I can't say as I am privy as to all the ways the IRS checks compliance, but I did read an interesting book one time. It was written by a former IRS person who did audits.
The book talked about several types of audits the IRS did. There is one type of audit in which a very small percentage of folks are randomly selected. The audit involved going through all your bank accounts, et'c. and through every deposit in your bank account. If you haven't documented it as something other than income (like a rebate check from brand X), the IRS treated it as income. From these audits, the IRS comes up with formulas for checking compliance with other tax payers.
(It sounded like one of those things that are not likely to happen, but it sounded even less fun than a regular audit...)
-DC :earsboy:

KNWVIKING
04-15-2004, 12:25 PM
NJ has 6% sales tax. Delaware has no sales tax. Believe it or not, people from NJ will sometimes go to DE and buy a major appliance or PC in order to save 6%.

On our NJ state tax form, there is a little section that allows us to report those out-of-state purchases and pay the applicable taxes to our state.

I'm curious if anyone has ever filled this section out.

FredS
04-15-2004, 01:16 PM
Originally posted by dcfromva
bom_noite,
I can't say as I am privy as to all the ways the IRS checks compliance, but I did read an interesting book one time. It was written by a former IRS person who did audits.
The book talked about several types of audits the IRS did. There is one type of audit in which a very small percentage of folks are randomly selected. The audit involved going through all your bank accounts, et'c. and through every deposit in your bank account. If you haven't documented it as something other than income (like a rebate check from brand X), the IRS treated it as income.

For what it is worth, I don't believe that the "kinder, gentler" IRS can now do this sort of thing. While you are required to maintain records regarding income, you are NOT required to maintain records regarding every deposit to your bank account. At some point nearly every governmental requirement comes down to a "reasonable" standard and few would reasonably expect you to remember the source of every deposit to your account for years. So, the IRS has no legal right to assume any deposit that you don't recall is income on which you are required to pay taxes.

bom_noite
04-15-2004, 01:26 PM
Very interesting on IRS and income.

pumpkinboy
04-15-2004, 01:38 PM
Originally posted by dcfromva
...Let's say you purchased SSR at 89 per point-- (89 divided by 50 years = $1.78 per point per year)... Using a different methodology, you could easily argue that the cost of those first year's points would be $10, since DVD is currently offering to buy them back from new buyers for that price thru MB. Taking the depreciation (bcs that's what it is, since DVC has $0 value at the end of the contract) early on is what most companies would do, and is surely how DVD is calculating ROFR price points. So pricing 1st yrs points at $10, 2nd yrs' at ~$7.55, 3rd yr at ~$6.80... is easily defensable accounting, and makes more sense than a straight-line method IMO.

So add to that your maintenence fees of $3.80, and postage and you are taking a loss on the rental of ~$4 a point, giver then SSR example. So since it's a wash at best, and a loss at worst, no reason to complicate your return with it, if you are not already reporting other rental income.

Still, it is best to consult your Tax professional about this anyway.

PamOKW
04-15-2004, 02:00 PM
This whole thing can get a little hairy. There are also considerations of how long you stay at DVC whether it is a rental property or another home. If you stay at DVC more than 14 days it might be considered a home and you would not be able to deduct the expenses. I have to figure this out myself for next year's taxes. :rolleyes:

Here's some information from the IRS

IRS Rental (http://www.irs.gov/taxtopics/tc415.html)

FYI -- Connecticut income tax forms also contain all kinds of threats if one doesn't declare items that were purchased out of state or on the Internet.

Doctor P
04-15-2004, 04:22 PM
FWIW, compliance audits ARE still done and the poster who indicated issues about bank deposits is technically correct. However, the issue of amount can also be at stake as that will matter with respect to whether it raises a red flag or not.

pirateeast
04-15-2004, 06:01 PM
Originally posted by KNWVIKING
NJ has 6% sales tax. Delaware has no sales tax. Believe it or not, people from NJ will sometimes go to DE and buy a major appliance or PC in order to save 6%.

On our NJ state tax form, there is a little section that allows us to report those out-of-state purchases and pay the applicable taxes to our state.

I'm curious if anyone has ever filled this section out.


In North Carolina you have to file out a form for all internet and out of state purchases then pay the NC sales tax rate ontop of the rate you payed when you bought it, unless they took out NC state sales tax at time of purchas (they have a formula to use on the form)

msdis
04-15-2004, 08:11 PM
dcfromva/ Doctor P- I am sure you are correct but I don't think the average wage earner who pays deductible taxes(off the top thru their employer) is at risk or that the IRS would care to perform such a task as scanning their bank accounts looking for a $5.00 rebate from Staples. I'm sure this is reserved for the "tips" earner, the self-employed, or anyone whose bank accounts show they couldn't possibly have the funds to support "meager" wages. They can also see income generated from unearned asset accounts and compare from one year to another to know who is suspect. I can see where this would be a great tool to get to the bottom of non reported income and to use as evidence though.

Doctor P
04-15-2004, 08:38 PM
I would agree generally, except compliance audits, unlike regular aucits, are basically random and not really based on or a function of the characteristics of the taxpayer. Without hijacking the thread with this, I will just note that you never want to go through a compliance audit as they basically need to confirm EVERY line on your tax return (and, yes, this does include identity and age--a birth certificate needs to be produced for every person on the tax return). Fortunately, they do very few of these and the program was suspended for a few years, but was renewed relatively recently. The idea behind the program to to check general compliance with the tax laws.

More on point with the topic, this is one of the most complex areas of tax law and one that is actually poorly understood by many CPAs. I would advise counsel from your tax professional to see what he or she advises in your particular situation.

Cruelladeville
04-15-2004, 08:44 PM
pumpkinboy--I agree with your thinking, so my points have depreciated to $0. That means that if I reported my renting my points, THE IRS would actually owe ME, rather than my owing them. So I did my patriotic duty, and didn't claim those points, since the US government is pretty much broke now, anyway. I had to do something to protect my future SS benefits.

Kick it up a notch!
04-15-2004, 10:24 PM
How would anyone find out???

disneyberry
04-15-2004, 11:31 PM
<font face="times" size="+0">Maistre Gracey, I did think about adding that option in the poll (that people don't report it or intend to amend their returns), but I didn't really feel comfortable asking people to say so, even if in an anonymous poll. ;)

If it wasn't clear, personally I did make every effort to look into this before I completed my tax returns. My tax situation other than this is quite simple, so for now I do not use a tax advisor. I also had a suspicion that this area of tax law is very complex, and not that many advisors would necessarily have expertise in the area. In any case, I took the most conservative approach to my DVC rental income, and only deducted the few expenses that were specifically mentioned in the IRS publications as deductible. (For example, I'm not so sure you can deduct Property Taxes for rental purposes if you already deducted it on Schedule A. Also, the portion of our annual dues that applies to Capital Improvements is NOT deductible except as part of the adjusted cost basis that you use to figure your depreciation expenses - which BTW as I understand it, should be calculated using the MACRS 27.5 years method... it ends up being a very small number. Not what you would think...) Also, the mention of deducting travel expenses... I don't really believe any DVC owners could truly claim that they fly down to Orlando just for the purposes of facilitating a DVC rental. :rolleyes:

IRS Publications 527, 946, 551 contain detailed info (pretty difficult to fully understand though, just like all IRS publications :p ). The Instructions for Form 4562, and for the 1040 Schedule E are also useful.

I also found the following two threads on the TUG very helpful:
http://www.tug1.net/tugbbs1/Forum1/HTML/004381.html
http://www.tug1.net/tugbbs1/Forum1/HTML/005921.html

BTW, I would argue that unless you stay at DVC more than 36 days a year, it's not possible to claim DVC as a "Dwelling Unit Used as Home" because the definition in Pub 527 is that you must use DVC for personal purposes for more than the GREATER of 1) 14 days, or 2) 10% of the total days it is rented to others at a fair rental price. Since DVD rents out DVC units to the cash paying public all the time, I would guess that at least one DVC room is rented out every day of the year. 10% of that would be 36.5 days. Just some food for thought. I am definitely no tax expert, but for those who plan to discuss this with a tax advisor next year, you could bring some of this info to them. ;)

Oh, and unless you are a business, you can't have a loss of income from renting DVC. Anyway, that's enough of my foray into tax accounting. ;)</font>

dcfromva
04-16-2004, 12:43 AM
"Taxpayer Compliance Measurement Program Audit
This rather lengthy and detailed audit asks you to document and prove every single item in your return. The IRS performs this audit in order to:
Determine compliance levels
Estimate tax gaps (the difference between the amount of income tax owed and the amount paid)
Develop formulas to decide what kinds of returns should be audited
Allocate audit resources
The IRS and Congress use the data from these audits for research and statistical purposes. These audits are arbitrary, and anyone can face them regardless of how carefully they prepare their tax returns."

Source: Allbusiness.com (http://www.allbusiness.com/articles/content/20473.asp)

The above type of audits were used to get a complicated math formula called the UI DIF which the IRS scores all taxpayers returns. (ie flagging the returns). (This fellow who wrote the book I read a few years back said the basis for the formula was secret even to the IRS examiners...)

Here's an exerpt from the IRS web page. (Further on, it says "Calibration audits.
These will consist of about 2,000 examinations that will check each line of the return. But, in a major change from earlier programs, taxpayers will not be required to provide line-by-line substantiation".... so, you would have to be mighty unlucky to get one of those :( )
Unreported Income
Unreported income represents the largest component of the tax gap. IRS has developed a new tool for identifying returns with a high probability of unreported income. The new tool is known as Unreported Income Discriminant Index Formula (UI DIF).

All individual returns have traditionally been assigned a DIF score rating the probability of inaccurate information on the return. The new UI DIF score rates the probability of income being omitted from the return. The IRS has customarily used indirect examination methods to identify unreported income but until now has had no systemic method for selecting the returns at highest risk for unreported income.

UI DIF gives the IRS the ability to systemically identify returns at high risk for unreported income and beginning this fall all returns will receive a UI DIF score in addition to the traditional DIF score.



IRS web page (http://www.irs.gov/newsroom/article/0,,id=105695,00.html)
One other juicy tidbit I read in the book (I think the title was something like "surviving an audit") was back when the author was an IRS examiner, they didn't bother with an audit unless they felt they could get at least $300.00 more in taxes...They had to make it worthwhile.. (This was several years ago, I don't know if they've changed this any)

-DC :ears: