Renting DVC points and the IRS

[codina818]

There have been previous discussions regarding the tax consequences of renting out your points. I am giving some basic information regarding IRS and potential tax consequences of renting those points out which is otherwise available in google searches. Just a few facts which you need to consider.

NOTHING HERE SHOULD BE CONSTRUED AS GIVING TAX ADVISE OR LEGAL ADVICE. Please consult a licensed tax professional regard your specific situation.

Every year or so, the tax bugaboo comes up, with everyone having a slightly different opinion.

1) Any money you get from renting out points is considered income.

2) If you have a rental property/vacation home, you are entitled to deductions. What is a deduction? That is subject to some degree of interpretation. But irs pub. 527 covers most of this. https://www.irs.gov/uac/about-publication-527

Does X years of vacation qualify as a vacation home or rental real estate? I really don't know the answer to that... it is the subject of endless debate on this and other boards. The closest thing that seems to apply is https://www.irs.gov/publications/p527/ch04.html regarding how to depreciate a portion of a co-op.. which seems to mirror SOME aspects of DVC.

3) On rental real property, you are entitled to depreciation, and under some circumstances, you are entitled to accelerated depreciation (ACRS - google it if you don't know what it is).

4) Real estate taxes are deductable in most instances.

5) Under some circumstances, you can deduct the expenses for "inspecting" your rental property/vacation home, usually for 1 time per year. This could involve transporation (ie airfare) but probably does not include park tickets..

In some states, Like South Carolina, trading your HHI points for something like DCL is considered a barter/taxable event (you lucky HHI owners!!!). Other states and the Federal govt. is not clear on that issue.

So, at least for HHI owners, using points for DCL is a "reportable" barter event... is it taxable for federal IRS purposes? I really don't know...

Sounds confusing? YUP!!!

 

[supersnoop]

I'm pretty sure the barter income rule is a federal IRS rule.

 

[Dean]

There have been previous discussions regarding the tax consequences of renting out your points. I am giving some basic information regarding IRS and potential tax consequences of renting those points out which is otherwise available in google searches. Just a few facts which you need to consider.

NOTHING HERE SHOULD BE CONSTRUED AS GIVING TAX ADVISE OR LEGAL ADVICE. Please consult a licensed tax professional regard your specific situation.

Every year or so, the tax bugaboo comes up, with everyone having a slightly different opinion.

1) Any money you get from renting out points is considered income.

2) If you have a rental property/vacation home, you are entitled to deductions. What is a deduction? That is subject to some degree of interpretation. But irs pub. 527 covers most of this. https://www.irs.gov/uac/about-publication-527

Does X years of vacation qualify as a vacation home or rental real estate? I really don't know the answer to that... it is the subject of endless debate on this and other boards. The closest thing that seems to apply is https://www.irs.gov/publications/p527/ch04.html regarding how to depreciate a portion of a co-op.. which seems to mirror SOME aspects of DVC.

3) On rental real property, you are entitled to depreciation, and under some circumstances, you are entitled to accelerated depreciation (ACRS - google it if you don't know what it is).

4) Real estate taxes are deductable in most instances.

5) Under some circumstances, you can deduct the expenses for "inspecting" your rental property/vacation home, usually for 1 time per year. This could involve transporation (ie airfare) but probably does not include park tickets..

In some states, Like South Carolina, trading your HHI points for something like DCL is considered a barter/taxable event (you lucky HHI owners!!!). Other states and the Federal govt. is not clear on that issue.

So, at least for HHI owners, using points for DCL is a "reportable" barter event... is it taxable for federal IRS purposes? I really don't know...

Sounds confusing? YUP!!!

It is income, the 14 day rental rule would not apply from a practical standpoint. You can deduct real expenses but unless you ONLY used it as a business, I don't think there's any way to depreciate it. I don't believe one could deduct "inspection" unless they owned volume and only used it otherwise as a rental.

 

[crisi]

I don't think you'd be entitled to depreciation as you own a lease. I don't think you'd get away with inspection, since you outsource that and have no control over the property - i.e. you can't fix any problems you find, so what use does inspection have other than a free vacation?

If someone renting out DVC points were my client, I'd tell them to take the cost of the rental, subtract dues, and claim it as income. Don't try anything fancier than that - it isn't worth the hassle if you get audited.

Barter is a federal rule. Anything done with economic gain - whether for cash or via barter - is technically a taxable event unless there is a carved out exception.

I might argue, if the gain were small enough, that it isn't material - more along the lines of a garage sale - and not claim the income at all. But that would depend on the amount of gain within the overall income and whether renting was not a regular occurrence.

 

[chalee94]

And although it's been said, many times, many ways...

If you donate the use of your timeshare or DVC points to charity (such as for a raffle or something), that donation is not tax deductible.

 

[chalee94]

It is income, the 14 day rental rule would not apply from a practical standpoint. You can deduct real expenses but unless you ONLY used it as a business, I don't think there's any way to depreciate it. I don't believe one could deduct "inspection" unless they owned volume and only used it otherwise as a rental.

And since DVC contracts specifically prohibit owning DVC for commercial use, the IRS would still have grounds to have those deductions thrown out.

 

[codina818]

And since DVC contracts specifically prohibit owning DVC for commercial use, the IRS would still have grounds to have those deductions thrown out.

DVC does not prohibit renting for money. And "commercial use" is not really defined by DVC in any substantial way.

The real question in my mind is "what is the exact nature of DVC interest".. other than the POS docs from DVC, never got any further clarification. And the description in the ownership documents are somewhat convoluted.

 

[supersnoop]

The real question in my mind is "what is the exact nature of DVC interest"

What type of answer are you looking for? Legally, you own X.XXX% of one particular unit within that resort's condo association. You own the building and improvements, but not the land. The land is leased to Disney Vacation Development (DVD) for 50 years, at which point it reverts to the Walt Disney Company (WDC).

 

[Deb & Bill]

DVC does not prohibit renting for money. And "commercial use" is not really defined by DVC in any substantial way.

The real question in my mind is "what is the exact nature of DVC interest".. other than the POS docs from DVC, never got any further clarification. And the description in the ownership documents are somewhat convoluted.

DVC did define commercial renting a few years ago. They determined that an owner making 20 or more reservations a year would constitute commercial renting. And a few members got caught up in that definition.

 

[crisi]

DVC did define commercial renting a few years ago. They determined that an owner making 20 or more reservations a year would constitute commercial renting. And a few members got caught up in that definition.

And I think the moment you set up a corporate entity and then rent out points from it - which is what I think Dean is saying - you'll have definitely crossed the line into commercial renting - Disney doesn't need to define that one.

 

[supersnoop]

DVC did define commercial renting a few years ago. They determined that an owner making 20 or more reservations a year would constitute commercial renting. And a few members got caught up in that definition.

That's a policy to help them identify commercial use, not the definition of commercial use. I know it seems like splitting hairs, but someone who meets that definition might be making legitimate reservations for family members, and someone who only makes a few reservations might still be doing so for commercial purposes. You can't use that to justify behavior.

 

[LAX]

There have been previous discussions regarding the tax consequences of renting out your points. I am giving some basic information regarding IRS and potential tax consequences of renting those points out which is otherwise available in google searches. Just a few facts which you need to consider.

NOTHING HERE SHOULD BE CONSTRUED AS GIVING TAX ADVISE OR LEGAL ADVICE. Please consult a licensed tax professional regard your specific situation.

Every year or so, the tax bugaboo comes up, with everyone having a slightly different opinion.

1) Any money you get from renting out points is considered income.

2) If you have a rental property/vacation home, you are entitled to deductions. What is a deduction? That is subject to some degree of interpretation. But irs pub. 527 covers most of this. https://www.irs.gov/uac/about-publication-527

Does X years of vacation qualify as a vacation home or rental real estate? I really don't know the answer to that... it is the subject of endless debate on this and other boards. The closest thing that seems to apply is https://www.irs.gov/publications/p527/ch04.html regarding how to depreciate a portion of a co-op.. which seems to mirror SOME aspects of DVC.

3) On rental real property, you are entitled to depreciation, and under some circumstances, you are entitled to accelerated depreciation (ACRS - google it if you don't know what it is).

4) Real estate taxes are deductable in most instances.

5) Under some circumstances, you can deduct the expenses for "inspecting" your rental property/vacation home, usually for 1 time per year. This could involve transporation (ie airfare) but probably does not include park tickets..

In some states, Like South Carolina, trading your HHI points for something like DCL is considered a barter/taxable event (you lucky HHI owners!!!). Other states and the Federal govt. is not clear on that issue.

So, at least for HHI owners, using points for DCL is a "reportable" barter event... is it taxable for federal IRS purposes? I really don't know...

Sounds confusing? YUP!!!

How many, if any, of these "facts" are applicable to DVC?? Are you trying to start a discussion on how best to take advantage of potential tax benefits of owning/renting out DVC? Or are you trying to solicit such advice?

LAX

 

[Dean]

And since DVC contracts specifically prohibit owning DVC for commercial use, the IRS would still have grounds to have those deductions thrown out.

IMO the DVC "commercial" rules and the IRS are different and almost unrelated things. One could own DVC and treat it as a business and still be within the DVC guidelines.

And I think the moment you set up a corporate entity and then rent out points from it - which is what I think Dean is saying - you'll have definitely crossed the line into commercial renting - Disney doesn't need to define that one.

It would depend on how it's done. As a formal website or as a legal entity, certainly. But simply doing so privately but meeting the other rules, maybe not.

The reality is that the issue of owning for personal use is more of a state wording requirement than a statement of intent even though some would like to think otherwise. It's spawned from the age old practice of enticing people to buy to rent or resale at a profit.

 

[codina818]

How many, if any, of these "facts" are applicable to DVC?? Are you trying to start a discussion on how best to take advantage of potential tax benefits of owning/renting out DVC? Or are you trying to solicit such advice?

LAX

Actually, i was trying to determine if there was any tax liabiltiy and the nature and scope of any deductions. It quickly devolved into the information I posted initially.

There is the practical aspect of what people usually do.. ie, look at the total income, deduct the yearly MF, and pay tax on the difference. However, this cannot be correct as the value of your property decreases every year.. so you would have to at least account for the "usage".. divide the purchase price by the total number of years remaining on the contract and deduct that as an "expense". It seems you should be allowed to do that, from a practical perspective.

But I began to wonder if that is really correct also. If you have real property (ie a home) which is rented out, you have something like a 30 year (or is it 33 years? Im not sure) depreciation schedule. When i began to delve into the exact nature of our ownership interest, it seems more like a co-op situation.. which is treated differently by the IRS.

If you purchase a "fresh" DVC property with about 50 years left, can u use the "regular depreciation" or do u divide the purchase price by 50 years to get your yearly usage..??? Quite frankly, im not sure which is the technically correct answer.

So the purpose of my post is to let people know what I found so far, and to get some input from people who may have found some answers which are technically correct.

 

[supersnoop]

Actually, i was trying to determine if there was any tax liabiltiy and the nature and scope of any deductions. It quickly devolved into the information I posted initially.

There is the practical aspect of what people usually do.. ie, look at the total income, deduct the yearly MF, and pay tax on the difference. However, this cannot be correct as the value of your property decreases every year.. so you would have to at least account for the "usage".. divide the purchase price by the total number of years remaining on the contract and deduct that as an "expense". It seems you should be allowed to do that, from a practical perspective.

But I began to wonder if that is really correct also. If you have real property (ie a home) which is rented out, you have something like a 30 year (or is it 33 years? Im not sure) depreciation schedule. When i began to delve into the exact nature of our ownership interest, it seems more like a co-op situation.. which is treated differently by the IRS.

If you purchase a "fresh" DVC property with about 50 years left, can u use the "regular depreciation" or do u divide the purchase price by 50 years to get your yearly usage..??? Quite frankly, im not sure which is the technically correct answer.

So the purpose of my post is to let people know what I found so far, and to get some input from people who may have found some answers which are technically correct.

I think you've missed a lot in your research. You cannot depreciate a timeshare. At least not under the vast majority of circumstances.

 

[Dean]

Actually, i was trying to determine if there was any tax liabiltiy and the nature and scope of any deductions. It quickly devolved into the information I posted initially.

There is the practical aspect of what people usually do.. ie, look at the total income, deduct the yearly MF, and pay tax on the difference. However, this cannot be correct as the value of your property decreases every year.. so you would have to at least account for the "usage".. divide the purchase price by the total number of years remaining on the contract and deduct that as an "expense". It seems you should be allowed to do that, from a practical perspective.

But I began to wonder if that is really correct also. If you have real property (ie a home) which is rented out, you have something like a 30 year (or is it 33 years? Im not sure) depreciation schedule. When i began to delve into the exact nature of our ownership interest, it seems more like a co-op situation.. which is treated differently by the IRS.

If you purchase a "fresh" DVC property with about 50 years left, can u use the "regular depreciation" or do u divide the purchase price by 50 years to get your yearly usage..??? Quite frankly, im not sure which is the technically correct answer.

So the purpose of my post is to let people know what I found so far, and to get some input from people who may have found some answers which are technically correct.

From a practical standpoint you cannot depreciate for tax purposes with a timeshares and use for personal use and you cannot use the 14 nights free rental option, but even with a home/condo you can only use depreciation to offset gains. To depreciate you'd have to own a volume, never use it personally and run it as a business to do so. You also couldn't count it as a rental business if the average rental is 7 days or less (See Dave McLintock's article on TUG).

 

[crisi]

If you purchase a "fresh" DVC property with about 50 years left, can u use the "regular depreciation" or do u divide the purchase price by 50 years to get your yearly usage..??? Quite frankly, im not sure which is the technically correct answer.

Neither. The association owns the property, you own a deeded lease. You don't own anything you can depreciate for tax purposes.