Does rented points = taxable income?

[Caskbill]

I hope this doesn't turn into a debate. But I've wondered if those who rent out points consider that income as taxable.

Now it's obvious that if I put some money in the stock market, and the stock went up and I got back more than I put in, that gain in money is considered taxable income.

So if someone has 100, or 5000 DVC points, pays $4.00 in dues and rents them out for $10 a point, is that 'gain' of $600 or $30,000, then taxable income.

Yes, there is an up front cost to buy the points in the first place. But many do their cash justifications in the first place by comparing that 'cost' to what would happen if they left the money in the market and compared the value of their DVC points to the value that money would make in the market. So the value in both cases means a gain in $$$$.

I'm no expert on tax laws by any means, but I believe with just a few exceptions (like a primary home), if you sell anything for more than you paid for it, the 'gain' on the sale is taxable.

If someone were to buy 2000 points, and never go to Disney themselves but always rent out the points, then over 40 years it is obvious that they would receive more in rental from those points than the total cost of the initial purchase and the annual fees. That gain is just as real as if it were made in the stock market. Or perhaps more applicable, buying an apartment building, charging rent, paying out for insurance, utilities etc, and still making a profit. I believe apartment owners have to pay income tax on that income after they deduct their legitimate expenses.

Now if you're renting out 30 points you can't use, I don't think anybody thinks it's a big deal. But what about those who practically make a business out of renting points? I wonder what the IRS does there?

Final note: In the lastest issue of VM it seems to me that Disney values a point at $5.00. This is based on the fact that you can purchase travel insurance for a cancelled reservation wherein you might lose your points. In their example if you bought insurance for 150 points and had a loss, they would reimburse you $750 which equates to $5.00 a point.

So, if you rent out a point for $10.00, then it seems to me, according to the law, you made $5.00 profit of taxable income.

Anyone else ever think of this? I've never rented points and never plan to, but this seems to be food for thought.

 

[drusba]

Rental income is taxable income that is required to be reported. You get to deduct maintenance fees in proportion to the amount of points you rent. For example, if you have 200 points and rent out 100, the income is declarable but you get to deduct half your maintenance fees for the year (up to the amount of rental income). Also note the income is regular income not capital gains and thus the regular income tax rates apply not capital gains rates.

 

[Gillian]

I believe that if you have rental income from real estate, your mortgage is considered an expense. So if you finance your points, the profit from renting would be smaller.

I think that if someone is making a business of renting DVC points, then they will also know legit ways of decreasing their tax liability. There are expenses associated with renting 2000 points that you will not encounter when renting out 30.

I know it is possible to make some money with DVC, but there have to be better business opportunites out there! Especially ones that don't cease to exist in 40 years. The evil renters as such a hot topic on this board, but how many are really making a business of it?

 

[bicker]

Whoa Nellie. You've got to VERRRRRRRRRRRRRRRRY careful.

There are many, many publications on the proper handling of rental property vis a vis taxes. I used to be a landlord, and there are no exclusions I know about that would except a DVC owner from the litany of rules that would have to be applied.

Either consult a tax accountant, or simply claim the income as additional income and don't try to deduct any of the expenses!

 

[crisi]

I do know that you cannot deduct timeshare mortgage interest if you rent your timeshare and do not stay there for more days than you rent it out.

I can't imagine the IRS would exclude mortgage interest (specifically) in this case, but let you deduct the actual mortgage.

 

[SINK]

Well, an Arthur Andersen tax accountant would probably advice (pre-Enron blow-up) to exclude the income as IRS would "more likely than not" not audit your return. I'm just kidding, and apologize to those who lost their jobs and life savings because of it.

Here is the CYA, please consult your tax professionals for proper advice. The forementioned is neither the expression nor been approved by my employer.

My two cents:
I would report the entire amount of the "rental revenue" on Form 1040 Schedule E. The deductible expenses would include the prorata portion of interest expense (in the event that the interest expense is already being deducted on Schedule A, the amount should be reduced. This would benefit the high income tax bracket individuals because 3% of the itemized deduction is "phased-out"), annual dues, and expenses incurred as result of the rental (advertising/telephone/referral commissions/postage). By the way, a portion of the tax return preparation fee could be allocated to Schedule E. Just ask your tax preparer to allocate their total fee to Schedule E preparation and all other.

Please be aware that I'm not individual income tax expert (I only prepare my own taxes and no one else).

 

[Cap]

Since the investment in DVC ownership has a finite life, wouldn't you also have a depreciation deduction of about 1/40th of your initial investment? This would be eqivilent to depreciation on other business buildings that have a finite life.

 

[Gillian]

Where were you guys when I was doing my taxes?

 

[RobDoc]

Where were you guys when I was doing my taxes?

You've still got 15 days...what's the rush??

 

[Doctor P]

I have tried to avoid putting my two cents in on this thread, but I think I better. My advice is to tread very lightly here, and to only do so with the advice of a tax professional. This is actually an area of great complexity and multiplicity of changing rules in the tax law. There are few uniform answers that can be given, and nearly every scenario you can imagine is a plausible and correct tax treatment is certain circumstances. For what it matters, these types of questions/problems have often been on the CPA exam as a test of your knowledge of the general foundations as applied to specific situations.

 

[bicker]

Originally posted by crisi
I do know that you cannot deduct timeshare mortgage interest if you rent your timeshare and do not stay there for more days than you rent it out.

I can't imagine the IRS would exclude mortgage interest (specifically) in this case, but let you deduct the actual mortgage.

It's not really a matter of what they'll allow or not allow -- it is a matter of what else you have to declare and factor in in doing so.

 

[bicker]

Originally posted by Cap
Since the investment in DVC ownership has a finite life, wouldn't you also have a depreciation deduction of about 1/40th of your initial investment? This would be eqivilent to depreciation on other business buildings that have a finite life.

That's just the beginning of the quagmire. If you sell your DVC ownership at some point, having depreciated it at some point might end up with you owing capital gains on the sale.

 

[Dean]

As I understand it, one can rent up 2 two weeks at a vacation property without declaring it as income. Of course one can't deduct anything other than property taxes if no income is declared. How this legally applies to DVC is beyond my comfort level as far as recommending what an individual should do.

 

[robinb]

Here's what Yahoo says on the subject:
http://taxes.yahoo.com/tips/home/vacation.html

 

[PamOKW]

RobinB -- Thanks for the information. I'm not in a position to have to worry about this yet but it's interesting to see the ramifications. I wonder how the DVC type timeshare fits into the equation? After all, with the variety of sizes and times of year we aren't comparing "apples to apples" accomodations. Sounds like anyone who rents a fair amount of time out for cash should really consult a tax expert.

 

[EROS]

Of course, "for the record", you're always best advised to contact a tax professional.

That said, I wouldn't bother reporting the income derived from the occasional rental of points. If you win $100 on a lottery ticket, do you report it??? How about your last $200 jackpot on the slots??? As with all tax considerations, conscience and superego play a primary role. Good Luck,