Any tax advantages?

[Buttercup Roberts]

I live in Maryland. Is there any quick (like, not hiring a tax attourney!) way to check and see if interest on DVC would be deductible?

 

[Doctor P]

It depends on your individual tax circumstances and the means by which you borrowed for DVC. In general, if it is a mortgage or a home equity line it is deductible to the extent that it qualifies as a "second home". Consult your own tax adviser to see how these circumstances fit you.

 

[Buttercup Roberts]

Consult your own tax adviser

Thanks, but Turbo Tax is strangely silent...

Maybe we are running too much with the big boys, because I hope my taxes never get crazy enough to need an Advisor!

 

[JimMIA]

A portion of your annual dues goes to pay local property taxes in Orange County, Florida. Those taxes would be deductible on your Federal Tax Return, provided you itemize deductions. Whether those taxes would be deductible on your state taxes, I have no idea.

Whether any interest on the financing of a DVC purchase would be deductible is far beyond the capacity of TurboTax, because it depends on your individual situation. Nobody can give you advice on that, and if they did, you'd be a fool to believe them!

Realistically, the net tax effect of both of those potential deductions is probably measured in dozens of dollars a year...not hundreds. The tax benefits of something like this are peanuts compared to the overall cost of membership, and really shouldn't even factor into your calculations. I understand and admire your interest in learning all about the financial aspects of DVC membership, but if you need tax breaks to make DVC work for you, it's not for you.

 

[Buttercup Roberts]

if you need tax breaks to make DVC work for you, it's not for you.

Agreed, this stuff ain't nothing cheap! But if let's say the tax breaks worked out to just about the cost of three DVC AP's...

 

[JimMIA]

Agreed, this stuff ain't nothing cheap! But if let's say the tax breaks worked out to just about the cost of three DVC AP's...

You would have one whoppin' dues bill each year!

 

[Doctor P]

You would have one whoppin' dues bill each year!

But interest, if deductible, could easily result in tax savings large enough to buy several annual passes depending on how many points one purchased.

 

[crisi]

But interest, if deductible, could easily result in tax savings large enough to buy several annual passes depending on how many points one purchased.

Saving the money by not financing and paying cash would buy you three times as many annual passes per year as the interest deduction would.

(Never understood people who pay interest for the tax break - unless you are leveraging the debt on a more profitable investment - and with DVC interest rates, that's a risky thing to do).

 

[Doctor P]

Saving the money by not financing and paying cash would buy you three times as many annual passes per year as the interest deduction would.

(Never understood people who pay interest for the tax break - unless you are leveraging the debt on a more profitable investment - and with DVC interest rates, that's a risky thing to do).

This actually may be a very short-sighted and simplistic way of looking at things. For many people, it makes PERFECT sense to borrow for DVC and it is consistent with good and sound financial planning to do so. If you view DVC as a prepaid vacation plan and put your vacation money into paying the mortgage over time (just as you would do with your vacations) and get a loan at 6-7% that is deductible the numbers work out pretty well.

What I was referring to in the previous post was strictly deductible vs. non-deductible interest, though.

 

[dumbo71]

You would have one whoppin' dues bill each year!

And you would have that complicated tax return like the "big boys" you spoke of.

 

[dumbo71]

This actually may be a very short-sighted and simplistic way of looking at things. For many people, it makes PERFECT sense to borrow for DVC and it is consistent with good and sound financial planning to do so. If you view DVC as a prepaid vacation plan and put your vacation money into paying the mortgage over time (just as you would do with your vacations) and get a loan at 6-7% that is deductible the numbers work out pretty well.

What I was referring to in the previous post was strictly deductible vs. non-deductible interest, though.

Ah, but the interest paid that Crisi spoke of is through DVC in the 10% range. Most go that route, I would guess, as it is hard to get unsecured loans for the amount of DVC. DVC also makes the loan process simple, fog a mirror, you aren't in jail or on your way, then you are approved.

Home equity loan????? Yeah, lets tie up the equity in our homes for a pre-paid vacation plan. Yeah, to use your words "it makes perfect sense" and is " consistent with good and sound financial planning."

I'll stick with my investment team, Thanks.

 

[Buttercup Roberts]

This actually may be a very short-sighted and simplistic way of looking at things. For many people, it makes PERFECT sense to borrow for DVC and it is consistent with good and sound financial planning to do so. If you view DVC as a prepaid vacation plan and put your vacation money into paying the mortgage over time (just as you would do with your vacations) and get a loan at 6-7% that is deductible the numbers work out pretty well.

What I was referring to in the previous post was strictly deductible vs. non-deductible interest, though.

That's exactly what we were thinking. We put money away every month into a savings account for non-monthly expenses, vacations included, and we could easily be sending that same vacation "payment" amount off to pay off something we'll "own" for the next 40+ years.

 

[crisi]

This actually may be a very short-sighted and simplistic way of looking at things. For many people, it makes PERFECT sense to borrow for DVC and it is consistent with good and sound financial planning to do so. If you view DVC as a prepaid vacation plan and put your vacation money into paying the mortgage over time (just as you would do with your vacations) and get a loan at 6-7% that is deductible the numbers work out pretty well.

What I was referring to in the previous post was strictly deductible vs. non-deductible interest, though.

I'm pretty fiscally conservative but I don't think borrowing for a non-necessity is EVER good and sound financial planning. Its sometimes "what we can afford to do" - but we can ALWAYS make better financial (if not emotional) choices.

 

[salmoneous]

I'm pretty fiscally conservative but I don't think borrowing for a non-necessity is EVER good and sound financial planning. Its sometimes "what we can afford to do" - but we can ALWAYS make better financial (if not emotional) choices.

I know this opinion is popular on this board, but I've never seen anyone explain it. WHY is borrowing for a non-necessity bad?

I'm about as fiscally conservative as the come. But I just don't see anything wrong with borrowing to pay for DVC in some circumstances. There's no debt involved, as DVC is a reasonably liquid asset that can be sold at any time to pay off the loan balance. And it's an asset that will be used over a long period of time, making it reasonable to pay for it over a long period of time if you choose.

So why is financing DVC bad?

 

[Buttercup Roberts]

I know this opinion is popular on this board, but I've never seen anyone explain it. WHY is borrowing for a non-necessity bad?

I think if you are going to pay some ridiculous interest rate, and you don't have savings for emergencies, aren't saving for retirement etc., yes, it's pretty darn foolish.

But, in our case, we have the basics covered, and we have the following things kind of pushing us over the edge:

1. We go every year and we always will, and if we ever did stop we'd either sell or we'd be dead and not care anymore
2. We are totally addicted to having a kitchen *and* being on site -- we used to stay at the Ft. Wilderness Cabins but they keep raising the price and cutting back on AP discounts to where it would be cheaper in the long run to buy into DVC
3. Our favorite resort is the BWV, which have some decent resales available
4. We like to go every year the first or second week of December, and BWV DVC rentals have been getting really hard to get, which is what we used to do, sometimes
5. We have about 1/2 of what it would cost to buy the points we need in cash, already, so we'd only need to finance what amounts to a cheap used car payment
6. We're getting ready to plunk down the equivalent of a year's use fees for another DVC rental for next December (if we can get one) anyways
6. We put away a set amount of money in a vacation fund every month that could just as easily be going to a finance company
7. From time to time we get windfalls from bonuses and royalties that we can use to pay down the loan faster
8. We never stay in DVC rentals on the weekends because of the point difference, when we're paying $10 per point, and we're sick of moving -- if we had enough points to stay for a whole week, that we owned, psychologically I think we'd just stay the whole week and it would be a lot more relaxing than switching resorts
9. We buy AP's every year, and the new DVC AP discounts are very nice

I guess that's about it in a nutshell. I dunno, I may wait and see if the AKLV's going on sale drops the price any on the BWV units, but the price never seems to do anything but creep up and up on all of it. I wish I'd been able to buy in 10 years ago! Knowing what I know now, if I'd been in this same position back then, I would have financed half my purchase in a heartbeat.

 

[crisi]

I know this opinion is popular on this board, but I've never seen anyone explain it. WHY is borrowing for a non-necessity bad?

I'm about as fiscally conservative as the come. But I just don't see anything wrong with borrowing to pay for DVC in some circumstances. There's no debt involved, as DVC is a reasonably liquid asset that can be sold at any time to pay off the loan balance. And it's an asset that will be used over a long period of time, making it reasonable to pay for it over a long period of time if you choose.

So why is financing DVC bad?

OK, lets say you pay $13500 for your DVC membership (150 points at $90). Let's say you pay cash. Let's say that within three months of buying DVC, you get laid off and decide to resell. You call Tom, he sells your DVC. You aren't going to get the $90 or whatever you paid - you might get $85. $12,750. Plus Tom will take a 10% commission - $1,275 - so you'll get $11,475. If you had a $13,500 loan out for that, you'd be $2000 "upside down" at a difficult time in your life.

Let's say you put down a deposit - you only have a $10,000 loan out for DVC. You are still paying (at 10%) $1,000 a year in interest while you pay off that loan. That's going to extend out any payback period. I can do a lot of things with $1000 a year. At a 33% marginal tax rate, you'll get a $333 tax break (assuming you qualify, I am not a tax advisor and don't know your circumstances, etc.), but you'll still be $666 out on the loan.

While you COULD say "well, we would have vacationed at Disney anyway" the fiscally conservative thing to do would be to save that money and pay cash. You wouldn't need to give up your Disney vacations, but you could stay much cheaper.

The other thing is that although DVC is relatively liquid, it also comes with a lot of emotional ties that make it less liquid. I don't think many people here could scrap DVC if times got tight without a thought. And its relatively liquid at the moment. A year ago, my house was relatively liquid at $360,000. Now its relatively liquid at $320,000 and dropping. If we have a recession (I saw 3 to 1 odds on a recession next year) you could be out of a job with dropping resale values on your DVC.

There is also the fiscally conservative ideas of having savings to start with. If you don't have the money to buy DVC, you probably don't have an emergency fund, short term savings fund (because that is what you would use to buy DVC with cash), long term savings fund, investment accounts, etc. Or maybe you have part of the building blocks for financial security (i.e. conservative financial security) - you have a 401k and a few months worth of emergency fund, but not a short term or long term savings fund.

Now, all of this is dependant on risk, and sometimes being fiscally conservative isn't the right choice - i.e. if you were going to charge the Y&BC every year on your Disney Visa ANYWAY, financing DVC is a better choice. It still isn't a good choice.

 

[Doctor P]

Things are not as cut and dried as people are making them. Another general rule of thumb is that you shouldn't pay for a long-term asset/capital asset as a current item. I am as fiscally conservative as they come, too, but one needs to draw a distinction between borrowing out of necessity vs. borrowing as a strategy. Sometimes the latter can be appropriate and responsible for a variety of reasons. Furthermore, paying over time can be a way of being fiscally responsible about maintaining a rainy day fund, too.

Take crisi's example from above. The person who borrowed would have about $13,000 in the bank to get them through when they got laid off and they would only be having to pay $200 or so a month on the loan. They might actually be better off having borrowed rather than having paid cash from a cash flow perspective. Things are not always the way they appear on the surface, IMHO.

 

[salmoneous]

Crisi,

Thanks for your response. In all honestly, you and I think a lot alike. I'd like to address some of your points - hopefully this will come across as conversational rather than argumentative. In all of this, my fundamental notion is that while financing DVC isn't a good idea in some cases, that doesn't mean it's a bad idea in every case.

One way you and I think alike is the notion that DVC shouldn't be an "obligation" - that owners should be able to walk away without owning anything .You point out that one could be "upside down" due to selling fees with 100% financing. I agree that such a situation is a bad idea. But it can be avoided by financing no more than what can be reasonably expected to be obtainable - 80-85% financing should be safe.

You also point out that real estate values can go down. But I don't think the example of your house is a fair one. When your house had a liquid value of $360,000 last year, everybody knew that price was an inflated bubble that could come crashing down quickly. Some thought the bubble would keep going up, but everyone recognized the danger. I don't think - and I don't think anyone else does either - that DVC prices are currently in a bubble, or are at risk to come crashing down. They may come down, but probably no faster that the loan balance.

Finally, you mention the emotional attachment issue. That's one I honestly hadn't thought about for DVC. Which is funny, because it's the argument *I* always make when explaining my need to pay off the mortgage on my house. My house isn't a liquid asset because there is no way in heck I'm ever going to sell it. If someone feels the same way about DVC, you are absolutely right that financing would be a bad idea.

Then you get to the notion of interest costs and whatnot. On that front, everybody has to run the numbers for themselves. But for the person who is going to vacation at Disney anyway, DVC is such a good bargain that buying will be the best bet even after financing for many people. And if DVC-with-financing is the better deal financially, why shouldn't they go for it?

Finally, you bring up the nation of prudent spending. If somebody has big credit card debt, no emergency fund or retirement savings, etc. then they shouldn't be taking deluxe Disney vacations in any form.

But there are many people who are fiscally sound, but don't happen to have $10K-20K of liquid cash lying around (either because they haven't built up the savings, or because their savings are tied up in investments.) I don't think it's a financial mistake for those people to go on nice Disney vacations each year. And if they are going to do that anyway, and if they run the numbers and financing DVC is better than paying out of pocket each year, then I don't see any problems with financing.

 

[Doctor P]

Very well put, salmoneous. I totally agree with your well-written post.

 

[Buttercup Roberts]

The person who borrowed would have about $13,000 in the bank to get them through when they got laid off and they would only be having to pay $200 or so a month on the loan. They might actually be better off having borrowed rather than having paid cash from a cash flow perspective. Things are not always the way they appear on the surface, IMHO.

This is exactly where we're at. We do have savings for retirement, car repairs, teeth going bad, etc., and we're spending X $$ on Disney World accomodations every year. Financing 1/2 of a DVC purchase is starting to look like a good idea to us because it's a way of managing our cash to bring down the long term cost of staying where we want to stay at Disney, without dipping into our savings so that we couldn't continue paying all our bills (including the DVC payments) over an interim period of unemployment.

Also, people's risk factors for unemployment and health emergencies vary.