Is renting out points worth it on your taxes?

[TDK44]

Not taxes if that is your real question

You got me!

 

[airjay75]

A few things.

One, whether something is written into the original terms of a contract, debt instrument, derivative, sale agreement, etc. absolutely matters from a tax law perspective. Go take a look at Treasury Regulation 1.1001-3 and 1.1001-4 on whether changes to debt instruments or certain derivative contracts result in a taxable exchanges. There are specific carve-out for changes to debt instruments that occur pursuant to the original terms of the debt instrument. I'm not saying that necessarily matters with exchanges with Disney, but it is something that can matter in the analysis under tax law.

Two, what constitutes a taxable exchange is not always clear. The landmark Supreme Court case on this is Cottage Savings v. Commissioner. There was quite a court battle over whether an exchange of mortgage participation interests constitutes a taxable exchange. The analysis in that Supreme Court case serves as foundational piece of case law for analyzing transactions that are uncertain. And, while plenty of transactions are clear cut, many are not.

Three, there are two questions with all of this. One, whether there is a 1099 reporting obligation and, two, whether there is a taxable exchange giving rise to taxable income. All Disney or the brokers care about are whether there is a 1099 reporting obligation. If there is income, it isn't their income. And, once they have determined there isn't a 1099 reporting obligation, they're done. They have no obligation to tell you whether something is or is not taxable.

As I've said before, I think the broker "point swaps" are clear. No 1099 reporting obligation, but clearly a taxable exchange with an amount of income that is very easy to determine.

On the Disney exchanges, I do think it is less clear. I think the best argument is the one @mkatsy is making. Essentially, when you purchase your DVC interest, you purchase a bundle of property rights that entitle you to certain things. Now, beyond using your points at your home resort, Disney maintains a lot of discretion about that bundle of property rights. But, all of that is very clearly laid out in the documents governing our DVC ownership. And, I think so long as what Disney is offering you for those points is something similar or akin to what you were offered when you originally purchased, I think any changes to that bundle of rights is not significant enough to warrant it being a significant enough change to the bundle of rights you originally purchased to give rise to a taxable exchange. They're giving you something similar for your points that is allowed under the terms of your original contract. It is part of the bundle of rights you originally purchased which inherently grants Disney a lot of discretion.

Alternatively, Disney may have just determined that the taxability of the exchanges aren't completely clear, but they're pretty comfortable that the exchange of vacation points for reservation points are items of zero value and give rise to no 1099 reporting obligation. And, in the absence of any specific guidance form the IRS, I suspect they also take comfort from the fact that any timeshare that offers exchanges through RCI or Interval International is essentially offering a similar sort of thing, and I don't think there is any practice within the industry to issue 1099s in connection with those transactions. And, if the IRS has ever thought about this, I suspect that, even if they did think there were some taxable transactions taking place with these exchanges, it would simply not be administrable to impose any 1099 reporting obligations or to look for taxable income in these transactions. And, the IRS routinely takes into account whether something is administrable in determining whether they should provide rules on things like this.

So, to summarize, I think there is some ambiguity in the tax analysis of the exchanges with Disney. There are some complexities and, to my knowledge, the IRS has never issued any guidance on these sorts of things. But, the broker "point swaps" to me are very clear, and I do not really see any ambiguity in whether those transactions are taxable - there is just no 1099 reporting obligation (or, at least the brokers are comfortable that there isn't any).

 

[mkatsy]

No I don't.

But NOT just because you are exchanging with Disney as a lot of other here do. But because you as a member are exchanging a very similar good/service noncommercially, which has an exception to the barter/barter exchange rules.

That is the hardest example by far because they both are even using DVC points, one is home resort vacation points and the other is bvtc vacation points. And because the system just converts for you back and forth within the system instantly under the hood. So if you don't read the contracts and rules you may not even realize that it is a type of exchange! Super interesting stuff

Ahh interesting do they really?
But do you have a source besides just "trust me bro" like it seems right now?

Please can you post what you are using for this opinion? Because I think you may be stretching it quite a bit as this is a very strange instance. It's not like a car where you are trading in the entire thing back to the dealership. You maintain ownership and instead just sign over the right to use for a single trip so it is not like a full trade in like a vehicle if you are using something like that.

When you buy a vacation club contract you are prepaying for the future delivery of the use of a room. The IRS considers timeshares (including point clubs) to be personal property. The “deeded real estate” scheme only exists in a few states (coincidentally, where Disney has a presence). When you pay $50K for a direct contract Disney takes the money and creates a liability to deliver the goods over the life of the contract. If the club rules allow exchanges (and ours does) you cannot exchange until you have taken control (delivery) of the points. They appear on your dashboard (Disney fulfills is annual liability, realizes the revenue for those points on its books) and you have to call in to exchange. If you exchange the accountants will treat it as a “return/immediate purchase” and Disney keeps its realized revenue and gives you the cruise. The points are removed from your dashboard, and Disney resumes control of the points.

 

[Tatebeck]

A few things.

One, whether something is written into the original terms of a contract, debt instrument, derivative, sale agreement, etc. absolutely matters from a tax law perspective. Go take a look at Treasury Regulation 1.1001-3 and 1.1001-4 on whether changes to debt instruments or certain derivative contracts result in a taxable exchanges. There are specific carve-out for changes to debt instruments that occur pursuant to the original terms of the debt instrument. I'm not saying that necessarily matters with exchanges with Disney, but it is something that can matter in the analysis under tax law.

Two, what constitutes a taxable exchange is not always clear. The landmark Supreme Court case on this is Cottage Savings v. Commissioner. There was quite a court battle over whether an exchange of mortgage participation interests constitutes a taxable exchange. The analysis in that Supreme Court case serves as foundational piece of case law for analyzing transactions that are uncertain. And, while plenty of transactions are clear cut, many are not.

Three, there are two questions with all of this. One, whether there is a 1099 reporting obligation and, two, whether there is a taxable exchange giving rise to taxable income. All Disney or the brokers care about are whether there is a 1099 reporting obligation. If there is income, it isn't their income. And, once they have determined there isn't a 1099 reporting obligation, they're done. They have no obligation to tell you whether something is or is not taxable.

As I've said before, I think the broker "point swaps" are clear. No 1099 reporting obligation, but clearly a taxable exchange with an amount of income that is very easy to determine.

On the Disney exchanges, I do think it is less clear. I think the best argument is the one @mkatsy is making. Essentially, when you purchase your DVC interest, you purchase a bundle of property rights that entitle you to certain things. Now, beyond using your points at your home resort, Disney maintains a lot of discretion about that bundle of property rights. But, all of that is very clearly laid out in the documents governing our DVC ownership. And, I think so long as what Disney is offering you for those points is something similar or akin to what you were offered when you originally purchased, I think any changes to that bundle of rights is not significant enough to warrant it being a significant enough change to the bundle of rights you originally purchased to give rise to a taxable exchange. They're giving you something similar for your points that is allowed under the terms of your original contract. It is part of the bundle of rights you originally purchased which inherently grants Disney a lot of discretion.

Alternatively, Disney may have just determined that the taxability of the exchanges aren't completely clear, but they're pretty comfortable that the exchange of vacation points for reservation points are items of zero value and give rise to no 1099 reporting obligation. And, in the absence of any specific guidance form the IRS, I suspect they also take comfort from the fact that any timeshare that offers exchanges through RCI or Interval International is essentially offering a similar sort of thing, and I don't think there is any practice within the industry to issue 1099s in connection with those transactions. And, if the IRS has ever thought about this, I suspect that, even if they did think there were some taxable transactions taking place with these exchanges, it would simply not be administrable to impose any 1099 reporting obligations or to look for taxable income in these transactions. And, the IRS routinely takes into account whether something is administrable in determining whether they should provide rules on things like this.

So, to summarize, I think there is some ambiguity in the tax analysis of the exchanges with Disney. There are some complexities and, to my knowledge, the IRS has never issued any guidance on these sorts of things. But, the broker "point swaps" to me are very clear, and I do not really see any ambiguity in whether those transactions are taxable - there is just no 1099 reporting obligation (or, at least the brokers are comfortable that there isn't any).

I agree with a lot of this, except one part. You say you think the broker swaps are clear and that they simply are set up to not require a 1099 from them and I do not think that that is clear at all and lean the other way since they say that there are tax benefits. Just saying that they won't report a 1099 and that you should commit tax fraud in order to get those tax benefits would be quite wild. It's is (clearly lol) murky at best. I know we've had this part of the discussion before and you think it's just the website developers being ignorant, yada yada.

When you buy a vacation club contract you are prepaying for the future delivery of the use of a room. The IRS considers timeshares (including point clubs) to be personal property. The “deeded real estate” scheme only exists in a few states (coincidentally, where Disney has a presence). When you pay $50K for a direct contract Disney takes the money and creates a liability to deliver the goods over the life of the contract. If the club rules allow exchanges (and ours does) you cannot exchange until you have taken control (delivery) of the points. They appear on your dashboard (Disney fulfills is annual liability, realizes the revenue for those points on its books) and you have to call in to exchange. If you exchange the accountants will treat it as a “return/immediate purchase” and Disney keeps its realized revenue and gives you the cruise. The points are removed from your dashboard, and Disney resumes control of the points.

I figured you were using something like that. I am aware and agree that the IRS treats most parts of timeshares as personal property. But even with that I am not sure that the direct DVC trade system works as you say it does.

Specifically I am not sure that they they can strictly treat it as a "return" of a product (which would have 0 tax liability as your rightly say). After the swap you still have the exact same contract you had before the direct swap. You didn't sign it back over for a period of time and then resign the contract, etc. You didn't actually return anything, you simply let them use the product that you purchased from them for a small period of time. Unless you have something from the IRS that says that you allowing them use of your timeshare for a year is still equivalent to an actual return? I truthfully do not know the answer to that question, whether they do or don't.

So this is less like a return/trade in of a true product like a car, but more like you let the dealership use your car for a rental car or courtesy car for a set period of time before taking it back and continuing to use your ownership of it, which you never relinquished at all, either as part of a sale or a return.

This seems awfully close to their ruling that you cannot deduct the donation of the use of a time share to a charity, only if you donate the actual contract itself in it's entirety. That is the closest thing I have seen to anything like this situation and without guidance from them we can't be sure what is correct.

It could be that DVC and the third party companies are using different parts of the tax code, like some of you say, or they could be using the same, we really don't know

And IMO it seems like a company may be able to take advantage of the system quite a bit of it does indeed work the way you say it does and write very vague contracts to allow themselves to avoid taxes while being a very successful (in all but the technical tax term) barter exchange swapping a lot of goods and services.

 

[airjay75]

you should commit tax fraud

There is a big difference between saying there are "tax benefits" and saying "you should commit tax fraud." And, any reputable business will always stop short of providing you anything resembling tax advice. They will always tell you to consult your own tax advisor. So, IMO, saying there are "tax benefits" is nearly meaningless.

 

[mkatsy]

I agree with a lot of this, except one part. You say you think the broker swaps are clear and that they simply are set up to not require a 1099 from them and I do not think that that is clear at all and lean the other way since they say that there are tax benefits. Just saying that they won't report a 1099 and that you should commit tax fraud in order to get those tax benefits would be quite wild. It's is (clearly lol) murky at best. I know we've had this part of the discussion before and you think it's just the website developers being ignorant, yada yada.

I figured you were using something like that. I am aware and agree that the IRS treats most parts of timeshares as personal property. But even with that I am not sure that the direct DVC trade system works as you say it does.

Specifically I am not sure that they they can strictly treat it as a "return" of a product (which would have 0 tax liability as your rightly say). After the swap you still have the exact same contract you had before the direct swap. You didn't sign it back over for a period of time and then resign the contract, etc. You didn't actually return anything, you simply let them use the product that you purchased from them for a small period of time. Unless you have something from the IRS that says that you allowing them use of your timeshare for a year is still equivalent to an actual return? I truthfully do not know the answer to that question, whether they do or don't.

So this is less like a return/trade in of a true product like a car, but more like you let the dealership use your car for a rental car or courtesy car for a set period of time before taking it back and continuing to use your ownership of it, which you never relinquished at all, either as part of a sale or a return.

This seems awfully close to their ruling that you cannot deduct the donation of the use of a time share to a charity, only if you donate the actual contract itself in it's entirety. That is the closest thing I have seen to anything like this situation and without guidance from them we can't be sure what is correct.

It could be that DVC and the third party companies are using different parts of the tax code, like some of you say, or they could be using the same, we really don't know

And IMO it seems like a company may be able to take advantage of the system quite a bit of it does indeed work the way you say it does and write very vague contracts to allow themselves to avoid taxes while being a very successful (in all but the technical tax term) barter exchange swapping a lot of goods and services.

the points are functioning as an “equity share”. If you buy a 150 point contract with a 50 year expiration, you have purchased 7,500 points. For the sake of argument, let’s say it cost you $35,000. Each equity share (point) has a value of roughly ~ 4.66. The terms of your contract state that each year you will receive 150 shares of the residual equity. Each year the remaining balance decreases, and that labels points based timeshare clubs with an expiration date as a depreciating asset. Every year value is consumed. However, this is also part of the appeal of the club. You have purchased 7,500 points in “today” dollars. You do not own the property in perpetuity. This is the test DVC fails with the IRS to be considered real estate. It’s the expiration date. The points pass the “stand alone” test. The points that you exchange with Disney are able to function as intended WITHOUT involving the rest of the contract’s points. They can “stand alone” they are goods and are recorded on the balance sheet as such.

 

[Tatebeck]

the points are functioning as an “equity share”. If you buy a 150 point contract with a 50 year expiration, you have purchased 7,500 points. For the sake of argument, let’s say it cost you $35,000. Each equity share (point) has a value of roughly ~ 4.66. The terms of your contract state that each year you will receive 150 shares of the residual equity. Each year the remaining balance decreases, and that labels points based timeshare clubs with an expiration date as a depreciating asset. Every year value is consumed. However, this is also part of the appeal of the club. You have purchased $7,500 points in “today” dollars. You do not own the property in perpetuity. This is the test DVC fails with the IRS to be considered real estate. It’s the expiration date. The points pass the “stand alone” test. The points that you exchange with Disney are able to function as intended WITHOUT involving the rest of the contract’s points. They can “stand alone” they are goods and are recorded on the balance sheet as such.

Hmm and you think that means that the whole points aren't worth anything and only represent your fractional ownership part of it doesn't matter at all then either?

I am still not sure whether you could consider that a return. You aren't returning anything you purchased, just letting them use it for a set period of time.

But say you are right and they can, then maybe they could be using separate separate ways to get around taxes vs the third party swaps. One using this "return" method if you think it could classify as such, and then the third parties are having the member do an exchange of similar services on a noncommercial basis.

 

[Tatebeck]

There is a big difference between saying there are "tax benefits" and saying "you should commit tax fraud." And, any reputable business will always stop short of providing you anything resembling tax advice. They will always tell you to consult your own tax advisor. So, IMO, saying there are "tax benefits" is nearly meaningless.

If you do not conveniently forget to mention it on your taxes (ie tax fraud) and it is actually taxable as you think then there are no tax benefits to be had. They are inextricably linked in your interpretation.

In fact that would actually make it harder for you to do your taxes legitimately as you would have to keep track of the amount yourself to correctly report it vs having them keep track for you and send you a 1099 (if they made it a requirement of course)

Having to do extra bookwork yourself is hardly a "tax benefit" of anything.

Unless they are not taxed on swaps, like I think they believe, then there would be actual tax benefits of course.

I know you will not agree and we can just drop it there I suppose as we have no idea what they truly meant by tax benefits unless someone from their accounting team or websites developers decided to chime in. It could be nearly meaningless as you say, though you have to make a lot of assumptions in order to get there right now

 

[airjay75]

If you do not conveniently forget to mention it on your taxes (ie tax fraud) and it is actually taxable as you think then there are no tax benefits to be had. They are inextricably linked in your interpretation.

In fact that would actually make it harder for you to do your taxes legitimately as you would have to keep track of the amount yourself to correctly report it vs having them keep track for you and send you a 1099 (if they made it a requirement of course)

Having to do extra bookwork yourself is hardly a "tax benefits" of anything.

Unless they are not taxed on swaps, like I think they believe, then there would be actual tax benefits of course.

I know you will not agree and we can just drop it there I suppose as we have no idea what they truly meant by tax benefits unless someone from their accounting team or websites developers decided to chime in. It could be nearly meaningless as you say, though you have to make a lot of assumptions in order to get there right now

There is no definition of “tax benefit” in the Internal Revenue Code of 1986, as amended. That is the law at hand. If you say there are “tax benefits,” but the law governing said benefits provides no definition, it’s a nearly meaningless term, especially on a website, as opposed to a document required to be filed with a regulatory agency.

Now, if you rely on that website statement, report no income, are audited by the IRS and found liable for tax on the income, could you sue them under some sort of civil law claim? Maybe. That’s not my area of expertise.

To put another way way, if I were legal advisor to dvcrentalstore.com, I’d tell them to take it down. There is some risk - not with the IRS, but that someone might sue you if they’re ever audited. If I were legal advisor to DVD, I’d say, let’s make sure we have a file memo to back this up. Very little risk, but we should be sure we’ve shown we have thought about it if ever questioned.

 

[airjay75]

And, like much all legal advice provided by lawyers to the business folks, it is often either ignored or risk accepted.

 

[airjay75]

And, even though we aren’t seeing things exactly the same way, @Tatebeck, I do applaud you for your analysis. You’re more capable than many tax professionals I’ve met.

 

[mkatsy]

I am still not sure whether you could consider that a return. You aren't returning anything you purchased, just letting them use it for a set period of time.

You never get the thing back. They consume it. They exhaust the value. Like drinking a can of soda. The asset is gone. What you are describing is more like renting a spare room in your house. The room itself will still be there after they have come and gone. You still have your asset, you’ve just let them use it for a short time. Edited to add: I found the regulating authority for hotel room accounting. It’s the Uniform System of Accounts for the Lodging Industry (USALI). Under hotel accounting metrics: they state that room rental is inventory (goods) for sale that is limited and perishable. The example they give is a gallon of milk.

 

[mkatsy]

Hmm and you think that means that the whole points aren't worth anything and only represent your fractional ownership part of it doesn't matter at all then either?

What this means is that the points themselves have no value. The value is imparted onto the points by the contract they represent. The points “carry” the value, they are not THE value. This is so people don’t bootleg points in their basement, without a contract, and try to sell them. Don’t bother … they have no value. It’s like a gift card at the store, no value is loaded no point in stealing them.

 

[Sandisw]

What this means is that the points themselves have no value. The value is imparted onto the points by the contract they represent. The points “carry” the value, they are not THE value. This is so people don’t bootleg points in their basement, without a contract, and try to sell them. Don’t bother … they have no value. It’s like a gift card at the store, no value is loaded no point in stealing them.

And, if you read the contract, it even says they are nothing more of a way to represent your ownership interest.

In the end, when you use the exchange programs, you are simply exchanging your interest for something else…

What I would be curious to see…is the invoice that one gets from DCL when it’s a exchange vs these cruise swaps.

 

[Brianstl]

When you buy DVC direct, you pay for the use of your points at DVC resorts AND through the exchange programs.

So, using them for DVC or other options is exactly the same thing from a legal and taxable situation.

Your contract with DVC is for more than just DVC rooms.

That is the point. If exchanges count, then why doesn’t an owner who exhanges their points for a different DVC room that is less value than their trade owe taxes on it?

BVTC is an exchange program, is it not?

Technically, within DVC, the more I think about it , it probably shouldn’t even be referred to bartering at all because you paid for the use of all those options when you signed your contract.

When you buy DVC direct, you actually buy Home Resort Vacation Points. Home Resort Vacation Points represent your ownership of real estate.

Exchanging your home Home Resort Vacation Points for DVC Vacations Points through the BVTC exchange for the use at other resorts would be considered an like kind exchange by the IRS because they are both used to represent an ownership of real estate. As such that kind of transaction is not subject to taxation.

Any other use of points for anything other than your use of a real estate interest is not part of your contract with DVC. The contract clearly states that this.

These special programs are not a component of or anappurtenance to any Ownership Interest or Additional Ownership Interest. Some or all Club Member benefit programs maybe limited, modified, canceled, or terminated at any time

 

[Sandisw]

When you buy DVC direct, you actually buy Home Resort Vacation Points. Home Resort Vacation Points represent your ownership of real estate.

Exchanging your home Home Resort Vacation Points for DVC Vacations Points through the BVTC exchange for the use at other resorts would be considered an like kind exchange by the IRS because they are both used to represent an ownership of real estate. As such that kind of transaction is not subject to taxation.

Any other use of points for anything other than your use of a real estate interest is not part of your contract with DVC. The contract clearly states that this.

Thank you! That was more what I was trying to communicate.