Is renting out points worth it on your taxes?

[RivShore]

The brokers are just a middle man, which basically leaves no way for them to avoid money being exchanged. Either they’re buying or selling points on behalf of their customers, or needing to buy whatever they set up to exchange for such points.

But all the money exchanging is within DVCRS, no? I'm not sure exactly how the exchange works with them but if it is simply "this cruise costs 100 points, please make a reservation for our customer x with those 100 points and the cruise is yours". The point giver never sees any cash and would not even know how to value any of it for their taxes, would they?

 

[Sandisw]

I would guess because it is still staying within one system. At no point in those transactions is money exchanging hands (except for administration fee).

eta- vs real dollars moving around:

The brokers are just a middle man, which basically leaves no way for them to avoid money being exchanged. Either they’re buying or selling points on behalf of their customers, or needing to buy whatever they set up to exchange for such points.

This is my understanding as well. It’s an exchange option through the program.

You are converting you points to reservation points which is the currency you get to use for the exchange.


Behind the scenes, the room is taken out inventory and then it’s rented so DVc can pay the other division.

With the swap, the contract for rental, even with a swap, has the owner’s name attached to it and remains in the owners membership

With the exchange, the room leaves the system and goes to Disney’s inventory.

When travel agents book DVC via cash, we see it the exact same way as non DVC inventory. It’s a contract with Disney, and all payments etc are the same.

ETA: Thst is why once converted, they can’t be turned back in to DVC home resort or vacation points to use for DVC bookings vis points.

 

[Sandisw]

But all the money exchanging is within DVCRS, no? I'm not sure exactly how the exchange works with them but if it is simply "this cruise costs 100 points, please make a reservation for our customer x with those 100 points and the cruise is yours". The point giver never sees any cash and would not even know how to value any of it for their taxes, would they?

See my post above. While no money changes hands, there is still a contract with a renter to rent points on your membership.

So, that renters trip is always tied to the owner and their membership.

Thats not what happens when you exchange for a cruise via the DVc exchange program.

 

[Brian Noble]

The point giver never sees any cash and would not even know how to value any of it for their taxes, would they?

As I think was alluded to earlier in the thread, this could be considered a "barter transaction." Barter transactions are taxable events, precisely to close the loophole that trading without cash would otherwise create.

It is not necessary to see the cash in hand, and there are ways to value it---by, for example, getting a contemporaneous quote for the good or service being obtained.

I've said it already, but I would want the advice of a tax accountant before I decided a point swap was not a taxable event. That's particularly true given that one of our members who may or may not be a tax attorney has suggested that this potentially is a taxable event. I'm certainly not going to take the broker's word for it, seeing as how (a) they profit from these transactions and (b) they have no fiduciary commitment to me.

However, I'd never do this in the first place, so for me this is purely hypothetical.

 

[airjay75]

And, to add, valuation is a separate question from whether a transaction is taxable. Just because something is difficult to value does not mean there was not a taxable exchange of one thing for another.

But, with the broker points swaps, valuation is not really a difficult question. They look up the price of the cruise, and then tell you how many points you need to rent based on the broker's current rates they're paying. My understanding from DVCRS is they basically create a debit balance of the amount you owe, and then you can choose which rentals they have available to meet that balance or you can even choose to rent out some confirmed reservations and ask for up to $20/point for your reservation. Then they simply keep the money they receive and put it towards your cruise balance rather paying it through to you.

 

[Tatebeck]

This question keeps getting more and more complicated every time I jump down the rabbit hole looking for clarification. So for funsies, let me tell you all what I have found since the last time I looked! Just a warning, this will be long (and boring) for many, so please just skip if this doesn't interest you
_______________
As some have said, if it fell strictly under "bartering" rules then it technically would appear to be taxable. But it would be taxable whether you swapped with a third party company or DVC or Interval International as any of the companies would be acting as a barter exchange or barter club where they use credits or points for members to swap for other items/services. This sounds a lot like DVC swaps whether third party (dollar credits) or first party (points), and there are no different rules for third party or first party items swapped in a barter exchange. So it doesn't matter if you are using a form of dollar credits like the third party or a set of points (vacation club points to reservation points) like DVC themselves. None of that exempts you from being taxable as a barter exchange.

However barter exchanges or clubs are required to send a 1099 to the user of the exchange and report it to the IRS, which leads me to believe that DVC and the third party swaps are NOT considering themselves being used as a barter exchange or barter club. Otherwise they would be very easy targets for the IRS to come down on them and make some easy money from every point swap (and we now know that number is around 20% of all DVC points in any given year!)
_____________
So they must be using some other parts of the tax code rules instead. One of the closest things I can compare is trading in a car (and I have brought this example up before). You are trading in a car as part of the payment for a new car (possibly with additional cash if the new car or used car you are trading for is worth more than your trade in). I think this is still a helpful comparison now, even though they are not exactly the same.

They removed the like kind exchange provisions years ago for everything except "real property" for businesses. All personal property has been removed from those exceptions, so the car trade ins are not using that.

From everything I have seen it appears that they are just using standard sale/barter rules and that they are just assuming that your car is trading in for less than you bought it for since cars depreciate so quickly, and selling personal property at a loss is not a tax deducible loss (or we would all be selling our old junk for pennies lol). But if you actually were to trade in or sell your car for more than you paid for it originally it would result in a capital gain and that increase would be taxable, it is just very rare and you would have to self report it.
___________
Now back to DVC. If you sell your contract for more than you bought it for, you would owe taxes on the gains of course. But rentals/usage are a bit trickier. If you rent out a reservation and receive cash then it appears you need to report those gains, minus your costs. But allowing the use of your timeshare appears to follow slightly different rules than renting your reservation for cash/selling your contract.

The easiest one to see is with donations as it is spelled out clearly and specifically. If you donate your reservation/points to a charity, you specifically are NOT allowed a tax deduction, regardless of how much the reservation is worth or how much it "sells" for at a charity auction. But if you were to rent out the reservation for cash and then donate that cash then you would pay tax on your just your gains, but then get a tax deduction based on the entire amount (your cost+your gains). So it would be better to rent then donate in this case instead of just donating the reservation.

https://www.redweek.com/resources/articles/donating-timeshare-to-charity#:~:text=The tax law specifically prohibits,Aspects of Renting Your Timeshare
"Someone contemplating a timeshare donation with a resulting tax benefit should ensure that it's the ownership of the week that is to be donated. The tax law specifically prohibits a tax deduction for donating the use of a week (e.g., donating this year's week) to charity."

But this just goes to show that there are ways in which they treat transferring the use of a week very differently from transferring the entire ownership of the deed or even renting a reservation for cash. So transferring/bartering with (aka transferring a partial interest in) the use of a time share week may not actually be taxed in the same way vs if you receive cash in exchange.
______
All of that being said I don't know if the companies are actually using something related to this info as a deciding factor in the taxability of swaps at all or using something completely different, I just thought this was interesting info that I had found. And I am not your tax attorney, yada yada, etc.

In the end, if all of the industry "experts" and DVC themselves are treating it as nontaxable and even saying that there is a tax benefit to doing it, I am not going to argue with them about it (even if they don't point to the exact tax code as their reasoning why. I wouldn't want to pay more taxes than I am required to after all). And they would be the first big fishes to be told by the IRS that their interpretation is incorrect, then change practices.

And I am not going to get started on how ridiculous enforcing every transaction in the country as bartering would be. Technically if a friend and I go out to eat and swap half of our meals or buy apps to share then that would need to be reported as the swap would be over $1 in value
___
And lastly I did see some info about the Augusta rule possibly being allowed specifically on deeded time shares and that you may be able to rent tax free (even for cash!) for up to 14 days of a stay per year as long as you also stayed there for at least 14 days that same year. And that was pretty interesting as well.

 

[VGCgroupie]

This question keeps getting more and more complicated every time I jump down the rabbit hole looking for clarification. So for funsies, let me tell you all what I have found since the last time I looked! Just a warning, this will be long (and boring) for many, so please just skip if this doesn't interest you
_______________
As some have said, if it fell strictly under "bartering" rules then it technically would appear to be taxable. But it would be taxable whether you swapped with a third party company or DVC or Interval International as any of the companies would be acting as a barter exchange or barter club where they use credits or points for members to swap for other items/services. This sounds a lot like DVC swaps whether third party (dollar credits) or first party (points), and there are no different rules for third party or first party items swapped in a barter exchange. So it doesn't matter if you are using a form of dollar credits like the third party or a set of points (vacation club points to reservation points) like DVC themselves. None of that exempts you from being taxable as a barter exchange.

However barter exchanges or clubs are required to send a 1099 to the user of the exchange and report it to the IRS, which leads me to believe that DVC and the third party swaps are NOT considering themselves being used as a barter exchange or barter club. Otherwise they would be very easy targets for the IRS to come down on them and make some easy money from every point swap (and we now know that number is around 20% of all DVC points in any given year!)
_____________
So they must be using some other parts of the tax code rules instead. One of the closest things I can compare is trading in a car (and I have brought this example up before). You are trading in a car as part of the payment for a new car (possibly with additional cash if the new car or used car you are trading for is worth more than your trade in). I think this is still a helpful comparison now, even though they are not exactly the same.

They removed the like kind exchange provisions years ago for everything except "real property" for businesses. All personal property has been removed from those exceptions, so the car trade ins are not using that.

From everything I have seen it appears that they are just using standard sale/barter rules and that they are just assuming that your car is trading in for less than you bought it for since cars depreciate so quickly, and selling personal property at a loss is not a tax deducible loss (or we would all be selling our old junk for pennies lol). But if you actually were to trade in or sell your car for more than you paid for it originally it would result in a capital gain and that increase would be taxable, it is just very rare and you would have to self report it.
___________
Now back to DVC. If you sell your contract for more than you bought it for, you would owe taxes on the gains of course. But rentals/usage are a bit trickier. If you rent out a reservation and receive cash then it appears you need to report those gains, minus your costs. But allowing the use of your timeshare appears to follow slightly different rules than renting your reservation for cash/selling your contract.

The easiest one to see is with donations as it is spelled out clearly and specifically. If you donate your reservation/points to a charity, you specifically are NOT allowed a tax deduction, regardless of how much the reservation is worth or how much it "sells" for at a charity auction. But if you were to rent out the reservation for cash and then donate that cash then you would pay tax on your just your gains, but then get a tax deduction based on the entire amount (your cost+your gains). So it would be better to rent then donate in this case instead of just donating the reservation.

https://www.redweek.com/resources/articles/donating-timeshare-to-charity#:~:text=The tax law specifically prohibits,Aspects of Renting Your Timeshare
"Someone contemplating a timeshare donation with a resulting tax benefit should ensure that it's the ownership of the week that is to be donated. The tax law specifically prohibits a tax deduction for donating the use of a week (e.g., donating this year's week) to charity."

But this just goes to show that there are ways in which they treat transferring the use of a week very differently from transferring the entire ownership of the deed or even renting a reservation for cash. So transferring/bartering with (aka transferring a partial interest in) the use of a time share week may not actually be taxed in the same way vs if you receive cash in exchange.
______
All of that being said I don't know if the companies are actually using something related to this info as a deciding factor in the taxability of swaps at all, I just thought this was interesting info that I had found. And I am not your tax attorney, yada yada, etc.

In the end, if all of the industry "experts" and DVC themselves are treating it as nontaxable and even saying that there is a tax benefit to doing it, I am not going to argue with them about it (even if they don't point to the exact tax code as their reasoning why. I wouldn't want to pay more taxes than I am required to after all.

And I am not going to get started on how ridiculous enforcing every transaction in the country as bartering would be. Technically if a friend and I go out to eat and swap half of our meals or buy apps to share then that would need to be reported as the swap would be over $1 in value
___
And lastly I did see some info about the Augusta rule possibly being allowed specifically on deeded time shares and that you may be able to rent tax free (even for cash!) for up to 14 days of a stay per year as long as you also stayed there for at least 14 days that same year.

 

[airjay75]

I’ll just quickly add that I don’t think you even need to get into the barter rules for these broker point swaps. They’re akin to renting your points privately and saying, instead of sending me a check, can you just send the bank that holds my mortgage a check for the same amount? So, you never “paid” money to the owner of the points, so you escape the 1099 reporting obligation. 1099 rules are very mechanical sort of because they have to be.

 

[mkatsy]

I’ll just quickly add that I don’t think you even need to get into the barter rules for these broker point swaps. They’re akin to renting your points privately and saying, instead of sending me a check, can you just send the bank that holds my mortgage a check for the same amount? So, you never “paid” money to the owner of the points, so you escape the 1099 reporting obligation. 1099 rules are very mechanical sort of because they have to be.

There are two different types of transactions. A “sale” and a “sale-purchase”. The Disney exchange is a “sale” (the direct points were sold by Disney. Resale is you assuming the original contract) and the IRS considers an exchange an extension of the original sales contract as long as both parties agree the values are the same. Every broker transaction is a “sale-purchase” where the proceeds (this means value, not necessarily cash) from the sale are used to acquire the new item. The IRS wants a cut of transaction #2. additionally, the contract is between you and Disney. A broker is no more a party to that contract than your mailman is.

 

[Tatebeck]

I’ll just quickly add that I don’t think you even need to get into the barter rules for these broker point swaps. They’re akin to renting your points privately and saying, instead of sending me a check, can you just send the bank that holds my mortgage a check for the same amount? So, you never “paid” money to the owner of the points, so you escape the 1099 reporting obligation. 1099 rules are very mechanical sort of because they have to be.

I don't think that is quite the case. That would most likely still be a barter or barter exchange situation using "credits" or (still just a cash rental) which would actually still have the 1099 obligation for the fair market value of the credits. They seem to think that there is a tax advantage to a swap. And unless they really want to get audited, just saying "we won't report it to the IRS" is not a true tax benefit lol

 

[airjay75]

I don't think that is quite the case. That would most likely still be a barter or barter exchange situation using "credits" or (still just a cash rental) which would actually still have the 1099 obligation for the fair market value of the credits. They seem to think that there is a tax advantage to a swap. And unless they really want to get audited, just saying "we won't report it to the IRS" is not a true tax benefit lol

So, I'm not as familiar with the 1099 rules regarding barter transactions and what triggers a 1099 reporting obligation there. But, the primary reason I wouldn't call this a pure barter transaction is that cash is clearly involved in the exchange. A classic barter transaction doesn't really involve any cash - I'll trade my used car to my dentist in exchange for 5 years worth of dental cleanings. Pure barters typically involve an exchange of goods/services for other goods/services. The broker point swap has a very explicit amount of cash that needs to be obtained from renters to pay for your cruise. The money received from the renter is just never paid to the DVC owner - instead, it goes directly to pay for cruise. And the broker isn't really providing you the cruise - they are just booking it on your behalf as a travel agent. The broker really takes on the position of an agent or nominee in these points swaps.

I don't think the brokers are taking the position that the swap is tax-free. I think they are absolutely taking the position that there is no 1099 obligation because they do not make any payment to the DVC owner. And, there are a lot of situations that arise with 1099s and other information reporting where, if you're not required to provide one, you simply aren't - it doesn't mean there isn't taxable income involved, it just means no tax forms are required. All the liability is on the individual for whom the taxable income is earned.

Interestingly, if you get paid by a broker through PayPal/Venmo, with the passage the OBBB this past year, you generally aren't going to receive 1099s anymore. So, if a 1099 is all someone wants to avoid, just make sure you receive payment through PayPal/Venmo.

I also had a conversation recently with another prominent U.S. based broker, and they said they don't issue 1099s at all for rentals. I was a bit perplexed by this, but they may be of the opinion and/or have structured payments such that they never touch the amounts that are paid to the DVC owner and, thus, they have no 1099 reporting obligation to them. Or, maybe they're just ignoring the law and don't feel like it's a big deal. Not sure.

 

[mkatsy]

So, I'm not as familiar with the 1099 rules regarding barter transactions and what triggers a 1099 reporting obligation there. But, the primary reason I wouldn't call this a pure barter transaction is that cash is clearly involved in the exchange. A classic barter transaction doesn't really involve any cash - I'll trade my used car to my dentist in exchange for 5 years worth of dental cleanings. Pure barters typically involve an exchange of goods/services for other goods/services. The broker point swap has a very explicit amount of cash that needs to be obtained from renters to pay for your cruise. The money received from the renter is just never paid to the DVC owner - instead, it goes directly to pay for cruise. And the broker isn't really providing you the cruise - they are just booking it on your behalf as a travel agent. The broker really takes on the position of an agent or nominee in these points swaps.

I don't think the brokers are taking the position that the swap is tax-free. I think they are absolutely taking the position that there is no 1099 obligation because they do not make any payment to the DVC owner. And, there are a lot of situations that arise with 1099s and other information reporting where, if you're not required to provide one, you simply aren't - it doesn't mean there isn't taxable income involved, it just means no tax forms are required. All the liability is on the individual for whom the taxable income is earned.

Interestingly, if you get paid by a broker through PayPal/Venmo, with the passage the OBBB this past year, you generally aren't going to receive 1099s anymore. So, if a 1099 is all someone wants to avoid, just make sure you receive payment through PayPal/Venmo.

I also had a conversation recently with another prominent U.S. based broker, and they said they don't issue 1099s at all for rentals. I was a bit perplexed by this, but they may be of the opinion and/or have structured payments such that they never touch the amounts that are paid to the DVC owner and, thus, they have no 1099 reporting obligation to them. Or, maybe they're just ignoring the law and don't feel like it's a big deal. Not sure.

First, all income is taxable regardless of 1099 reporting thresholds. The final responsibility lies on the tax payer. That being said, the 1099 reporting thresholds depend on who is in the White House - I’ll leave it at that… you can Google it.

 

[Tatebeck]

So, I'm not as familiar with the 1099 rules regarding barter transactions and what triggers a 1099 reporting obligation there. But, the primary reason I wouldn't call this a pure barter transaction is that cash is clearly involved in the exchange. A classic barter transaction doesn't really involve any cash - I'll trade my used car to my dentist in exchange for 5 years worth of dental cleanings. Pure barters typically involve an exchange of goods/services for other goods/services. The broker point swap has a very explicit amount of cash that needs to be obtained from renters to pay for your cruise. The money received from the renter is just never paid to the DVC owner - instead, it goes directly to pay for cruise. And the broker isn't really providing you the cruise - they are just booking it on your behalf as a travel agent. The broker really takes on the position of an agent or nominee in these points swaps.

I don't think the brokers are taking the position that the swap is tax-free. I think they are absolutely taking the position that there is no 1099 obligation because they do not make any payment to the DVC owner. And, there are a lot of situations that arise with 1099s and other information reporting where, if you're not required to provide one, you simply aren't - it doesn't mean there isn't taxable income involved, it just means no tax forms are required. All the liability is on the individual for whom the taxable income is earned.

Interestingly, if you get paid by a broker through PayPal/Venmo, with the passage the OBBB this past year, you generally aren't going to receive 1099s anymore. So, if a 1099 is all someone wants to avoid, just make sure you receive payment through PayPal/Venmo.

I also had a conversation recently with another prominent U.S. based broker, and they said they don't issue 1099s at all for rentals. I was a bit perplexed by this, but they may be of the opinion and/or have structured payments such that they never touch the amounts that are paid to the DVC owner and, thus, they have no 1099 reporting obligation to them. Or, maybe they're just ignoring the law and don't feel like it's a big deal. Not sure.

It's not that they are just saying that they will not report it, which would be sketchy, but they are specifically saying that there are "tax benefits" to performing a swap.
From the DVC Rental Store site:


And tax benefits are by definition:

• Tax benefits reduce your tax liability through credits, deductions, exclusions, and exemptions.

So they obviously think that there is some credit, deduction, exclusion, or exemption that is beneficial for swaps over normal renting, not that they are promoting tax fraud

 

[mkatsy]

It's not that they are just saying that they will not report it, which would be sketchy, but they are specifically saying that there are "tax benefits" to performing a swap.
From the DVC Rental Store site:

View attachment 1037317
And tax benefits are by definition:

• Tax benefits reduce your tax liability through credits, deductions, exclusions, and exemptions.

So they obviously think that there is some credit, deduction, exclusion, or exemption that is beneficial for swaps over normal renting, not that they are promoting tax fraud

Well, food eaten on a Disney vacation magically doesn’t have any calories so maybe rent money spent on cruises magically doesn’t have tax liability. if only that worked for groceries and gasoline too!