Revisiting Stripped Contracts

[Bing Showei]

For the last year, while shopping for the right DVC contract, I was seeing a huge spread in asking prices on the resale sites, and struggled hugely with how to figure out the fair price given how loaded/stripped a contract was.

I repeatedly ran into the assertion that stripped contracts are rarely a good deal, or that you had to negotiate down hugely to make it worth it.

But when I did the math, that seemed less and less true.

If you do not need the points for the stripped years or are willing to borrow from subsequent years, by negotiating the price a little, there are deals to be had.

For this analysis, I look at VGF, but this should translate across the board for all DVCs.

Here are two real-world examples of a 250pt and 240pt VGF Contract:

Loaded
250pts - $140/point – April UY (via Fidelity)

250-2017
250-2018
250-2019


Fully Stripped
240pts - $135/point – March UY (via DVC Resale Market)

0-2017
0-2018
240-2019


At first blush, I would guess most wouldn’t even consider the fully stripped contract, but the math suggests a shopper should reconsider things.

One idea that people will often posit is that with the loaded points, you can rent them out, bringing the effective cost per point down significantly.

Unless there is a lot of tax evasion taking place (David’s issues a filed 1099), for each point you rent at $14 dollars, the tax reduces that down to closer to $8.36. This assumes you are in a 25% tax bracket with 12.4% Social Security and 2.9% Medicare totaling 40.3% tax.

$14 - $5.64 (tax) = $8.36 value for each point

For comparison purposes I took the loaded contract and stripped it via renting out points until 2019.

Assuming all carried the same $785 closing cost and that people would have to pay MF on current use year, the total contract costs come out as follows if we made every contract stripped:

Loaded (via Fidelity)

$35,785.00 (Contract Cost)
+$2,950.00 (2017, 2018 MF)
-$4,180.00 (Renting out points after taxes for 2017, 2018)
__________
$34,555.00 (or $3.07/pt/ year 2019 through 2064)


Fully Stripped (via DVC Resale Market)

$33,185.00 (Contract Cost)
+$1,416.00 (2018 MF)
-$1,416.00 (2018 MF Refund from Seller)
_________
$33,185.00 (or $3.07/pt/ year 2019 through 2064)

Applying this same calculations to a fully stripped Poly contract at The Timeshare Store with the $854 closing cost (@kboo):

Loaded
200pts - $145/point – Hypothetical “Fair Market”

200-2017
200-2018
200-2019

Fully Stripped
200pts - $140/point – March UY (via TSS)

0-2017
0-2018
200-2019

The $/pt/yr breakdown for these two contracts are as follows:

Loaded (Hypothetical “Fair Market”)

$29,854.00 (Contract Cost)
+$2,456.00 (2017, 2018 MF)
-$3,344.00 (Renting out points after taxes for 2017, 2018)
_________
$28,966.00 (or $3.08/pt/ year 2019 through 2066)

Fully Stripped (via TSS)

$28,854.00 (Contract Cost)
+$1,228.00 (2018 MF)
-$1,228.00 (2018 MF Refund from Seller)
_________
$28,854.00 (or $3.05/pt/ year 2019 through 2066)

BUT, by negotiating the stripped contract down by just $5 to $135/pt.

Fully Stripped (via TSS)

$27,854.00 (Contract Cost)
+$1,228.00 (2018 MF)
-$1,228.00 (2018 MF Refund)
_________
$27,854.00 (or $2.96/pt/ year 2019 through 2066)

Point being, if it’s the right UY, the right home resort, the right number of points, and you don’t immediately need the points, or are willing to borrow, a little negotiation can turn that stripped contract into one of equal value as the loaded one selling for a higher $/pt.

All assuming you don’t dodge your taxes, of course.

EDIT: Mathematical error with loaded contract $/pt/yr calculated from 2017 as opposed to 2019.

 

[Ben E N]

You are assuming that people who rent out their points using the rent board on disboards are reporting that income to the feds. I doubt that is the case for most renters, which does skew the equation considerably.

Still, an impressive report that does show how renting is not nearly as profitable as many assume.

 

[3cuteboys]

You are forgetting that you can offset rental "income" with your costs to acquire and maintain those points. I doubt anyone in these hypothetical scenarios would actually owe any tax on renting those points. That can change your scenario significantly. Also, you can't really discount the fact that most actually want to purchase points and use them for their next vacation.

 

[Bing Showei]

You are forgetting that you can offset rental "income" with your costs to acquire and maintain those points. I doubt anyone in these hypothetical scenarios would actually owe any tax on renting those points. That can change your scenario significantly. Also, you can't really discount the fact that most actually want to purchase points and use them for their next vacation.

I'm not discounting that people need their points at all. I'm speaking to a subset of buyers (who I've seen a lot of on the boards) who speak to wanting to buy into a particular home resort but in the same use year; essentially, people looking for a very specific contract. Whether that's supplementing your home resort to go every year (as opposed to every other year), or at an Epcot resort to alternate between MK and Epcot. To those who find themselves sorting lists by use year, this is important to consider.

In terms of the tax deductions. I'd be curious what sort of direct acquisition and maintenance costs people claim on their taxes to offset the earnings to zero. I am genuinely curious, as I imagine down the road I'll need to rent out some of my points.

If they are real expenses directly associated with the points, then wouldn't that also support the idea that renting points are not as profitable as just $14/point?

 

[3cuteboys]

Correct, it is simplifying it to say you would profit $14/ point. Most people I have seen say that about offsetting their purchase price if they rent out points in their first year. Which I do agree with.
Consult your tax advisor should you ever have rental income to report, but you obviously would have annual maintenance fees per point that would absolutely be a direct expense on the point you are renting. You also could deduct the initial cost of those points, likely through a depreciation schedule, but again I am not trying to give anyone specific tax advice. Just keep in mind if you have to report 1099 rental income, there are expenses you can deduct against that income.

 

[Dean]

If you just assume they are both 250 its and the same UY, the difference in value is simply what those points would rent for. Since this is a short term difference of 2 years, it's short term money and as such one cannot reasonably divide it over the life of the contract. The difference in value here for VGF is somewhere in the $30 a point range minus any dues paid and taxes due that would be extra. So realistically the difference is around $20 a point or slightly less assuming one is reimbursing the full years dues on the 2017 points and considering one is again paying 2 or 3 months worth of dues on the 2017 points as part of the 2018 fee. And in reality the "loaded" contract is not fully loaded else it'd also have the 2016 points banked to 2017. Personally I'd easily consider a stripped contract if it matched my other criteria and was financially reasonable, in fact, I'd rather have one at a truly comparable price. VGF is a bit of an enigma along with VGC due to the relatively low number of contracts so if one must have a contract at these 2 resorts, the higher price of a stripped contract may be the best available.

 

[Bing Showei]

If you just assume they are both 250 its and the same UY, the difference in value is simply what those points would rent for. Since this is a short term difference of 2 years, it's short term money and as such one cannot reasonably divide it over the life of the contract. The difference in value here for VGF is somewhere in the $30 a point range minus any dues paid and taxes due that would be extra. So realistically the difference is around $20 a point or slightly less assuming one is reimbursing the full years dues on the 2017 points and considering one is again paying 2 or 3 months worth of dues on the 2017 points as part of the 2018 fee. And in reality the "loaded" contract is not fully loaded else it'd also have the 2016 points banked to 2017. Personally I'd easily consider a stripped contract if it matched my other criteria and was financially reasonable, in fact, I'd rather have one at a truly comparable price. VGF is a bit of an enigma along with VGC due to the relatively low number of contracts so if one must have a contract at these 2 resorts, the higher price of a stripped contract may be the best available.

Sorry, Dean. I don't follow how you can't consider the short term cost difference over the long term. The value people often see in DVC is that you "lock in today's rate" for the years to come. So how do you evaluate what you're paying in "today's rate" for a room (vs. renting, vs. rack) without figuring out the value of what you're buying over the time with which you are buying it for? That calculation is the foundation upon which one calculates what you're spending per year (plus mf).

I guess my only point is sort of what you said at the end which is given the right UY, right resort, right point numbers of interest, stripped contracts may warrant a second look.

 

[Dean]

Because in 2-3 years the contracts are exactly the same. The only benefit or loss is short term. It wouldn't really be much different than buying retail vs resale for a higher price with no loss of benefits. In that situation it's also a short term issue and not one that can be amortized over the life of the contract, at least not reasonably. Doing so would simply be a justification and not a reasonable choice IMO. But as I noted, there are other factors but mostly for smaller contracts and difficult to find, high demand resorts.

 

[sndral]

...One idea that people will often posit is that with the loaded points, you can rent them out, bringing the effective cost per point down significantly.

Unless there is a lot of tax evasion taking place (David’s issues a filed 1099), for each point you rent at $14 dollars, the tax reduces that down to closer to $8.36. This assumes you are in a 25% tax bracket with 12.4% Social Security and 2.9% Medicare totaling 40.3% tax.

$14 - $5.64 (tax) = $8.36 value for each point
....

You only pay social security & Medicare taxes on earned income, rental income is unearned income 99% of the time, so you need to delete those from your tax calculations, and as mentioned above you subtract your expenses - here MFs - and pay tax only on your net rental income.

 

[Bing Showei]

You only pay social security & Medicare taxes on earned income, rental income is unearned income 99% of the time, so you need to delete those from your tax calculations, and as mentioned above you subtract your expenses - here MFs - and pay tax only on your net rental income.

Thank you for pointing out that rental income is handled differently than earned income. The entirety of the maintenance fee is not tax deductible, just the property tax portion. Removing the SS and Medicare, and deducting the property tax would look as follows:

Loaded (Hypothetical “Fair Market”)

$29,854.00 (Contract Cost)
+$2,456.00 (2017, 2018 MF)
- $632.00 (tax deductible portion of MF - $1.58/pt)
-$4,200.00 (Renting out points after taxes for 2017, 2018)
_________
$27,478.00 (or $2.92/pt/ year 2019 through 2066)

Negotiating the stripped contract down by 5%, or $7, to $133/pt.

Fully Stripped (via TSS)

$27,454.00 (Contract Cost)
+$1,228.00 (2018 MF)
-$1,228.00 (2018 MF Refund)
_________
$27,454.00 (or $2.92/pt/ year 2019 through 2066)

I maintain that if the right contract comes along, stripped contracts, when negotiated properly, should be reconsidered by those with specific UY/resort needs.

 

[Phatscott25]

The entirety of the maintenance fee is not tax deductible, just the property tax portion.

I'm not understanding this. If you are renting a certain number of points you could most certainly deduct the entirety of the maintenance fees on that same number of points.

ETA: I also don't think you're taking into consideration that most loaded contracts are maintenance fee free for the current year. I know this isn't always the case but I definitely wouldn't pay a premium for a loaded contract that wasn't "seller pays MF's 2017."

 

[Bing Showei]

I'm not understanding this. If you are renting a certain number of points you could most certainly deduct the entirety of the maintenance fees on that same number of points.

ETA: I also don't think you're taking into consideration that most loaded contracts are maintenance fee free for the current year. I know this isn't always the case but I definitely wouldn't pay a premium for a loaded contract that wasn't "seller pays MF's 2017."

How does the saying go? Tax advice on the internet is as valuable as what you pay for it.*

The word I got from my CPA is that the property tax portion of the maintenance fee is all I can deduct.

From DVC info (https://*******.com/financial/dvc-annual-dues/)
Annual dues cover operating expenses (housekeeping, transportation, maintenance, utilities, Front Desk services), administrative expenses (Member Services, member mailings, insurance), refurbishment expenses (updating and maintaining the interior, exterior, and common areas), and real estate taxes (property taxes).

My experience has been unless they're banked points for the previous year, any points you can use or bank you reimburse MF on. This is normally prorated to the points left, but seller paying MF on current UY points are more the exception, I've found.

*I do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

 

[supersnoop]

As an owner can deduct any property tax onyou income tax filing, whether you rent your points or not. When renting out your points, you can use the maintenance fees as your cost basis, so you only pay income tax on the difference.

“Loaded” contracts come with free points; where you don’t cover the maintenance fees. “Stripped” contacts may require you to pay maintenance fees on points that have already been used. There are a lot of variables in every situation, but stripped contracts are almost always overvalued in the resale market.

 

[Bing Showei]

As an owner can deduct any property tax onyou income tax filing, whether you rent your points or not. When renting out your points, you can use the maintenance fees as your cost basis, so you only pay income tax on the difference.

“Loaded” contracts come with free points; where you don’t cover the maintenance fees. “Stripped” contacts may require you to pay maintenance fees on points that have already been used. There are a lot of variables in every situation, but stripped contracts are almost always overvalued in the resale market.

You discovered another math error. The deduction for 2018 points can be claimed by the stripped contract buyer as well. This actually brings an offer price to about $134.50 equivalent.

It seems there is a lot of variable around how people define loaded vs. fully loaded vs. stripped, but regardless of semantics, I'm referring to stripped as a contract that has no net affect on the buyer until there is access to points. In the past year, I have never seen a contract where the buyer pays MF for points they don't use. That sounds really mean. Often a "selling point" is "No maintenance fees until 2019." Yay. Language akin to buying a home with "lots of possibilities."

While I would agree that asking prices for stripped contracts in the resale market are overvalued, the point of this thread to is to look closely at broad language such as "stripped contracts are almost always overvalued" and figure out how true that actually is. The math doesn't seem to support it.

 

[Phatscott25]

How does the saying go? Tax advice on the internet is as valuable as what you pay for it.*

The word I got from my CPA is that the property tax portion of the maintenance fee is all I can deduct.

Agreed about free tax advice on the internet, but since I am a CPA myself I found it prudent to point out what I did before others got the wrong impression. That being said, I'm not doubting your CPA. However I believe, as @supersnoop pointed out above, that they are referring to the ability to deduct the tax portion of your MF's on your income tax filing regardless of whether you rented points. If you rent points, you can most certainly deduct more expenses than just property taxes. Ask your CPA for clarification and check out IRS Schedule E.

 

[Bing Showei]

Agreed about free tax advice on the internet, but since I am a CPA myself I found it prudent to point out what I did before others got the wrong impression. That being said, I'm not doubting your CPA. However I believe, as @supersnoop pointed out above, that they are referring to the ability to deduct the tax portion of your MF's on your income tax filing regardless of whether you rented points. If you rent points, you can most certainly deduct more expenses than just property taxes. Ask your CPA for clarification and check out IRS Schedule E.

I forwarded to him my maintenance fee breakdown and he said property tax was it. He would concur that there are other expenses I can claim, if I bought a new computer to handle all the emails involved in renting points, if I subscribed to Disney magazine to research my property, if I used my "home office" to do the rental work, etc.

Some other recommendations (and even those above) were a stretch, but all legitimate and tax deductible. The whole of my MFs was not.

Maybe I need a new CPA.

 

[supersnoop]

You discovered another math error. The deduction for 2018 points can be claimed by the stripped contract buyer as well. This actually brings an offer price to about $134.50 equivalent.

The loaded contract buyer would have that same ability, and maybe more. That calculation should be a wash.

 

[CarolMN]

I forwarded to him my maintenance fee breakdown and he said property tax was it. He would concur that there are other expenses I can claim, if I bought a new computer to handle all the emails involved in renting points, if I subscribed to Disney magazine to research my property, if I used my "home office" to do the rental work, etc..........

Did you specifically ask him how to calculate the portion of your rental proceeds that should be reported as unearned income on your return? That is a separate question from what is deductible from your total income on your tax return. I think you and he are not on the same page and he is not answering/understanding what we are saying & you are proposing in your calculations.

All of the MF components (and probably a portion of the initial buy-in) that are associated with the points you rent can be subtracted from the rental proceeds and the net amount is what you report as unearned income. The property taxes associated with the points that you do NOT rent can be itemized and deducted from your AGI just as any other property taxes (such as those for your primary residence) that you pay can be deducted.

 

[Bing Showei]

Did you specifically ask him how to calculate the portion of your rental proceeds that should be reported as unearned income on your return? That is a separate question from what is deductible from your total income on your tax return. I think you and he are not on the same page and he is not answering/understanding what we are saying & you are proposing in your calculations.

All of the MF components (and probably a portion of the initial buy-in) that are associated with the points you rent can be subtracted from the rental proceeds and the net amount is what you report as unearned income. The property taxes associated with the points that you do NOT rent can be itemized and deducted from your AGI just as any other property taxes (such as those for your primary residence) that you pay can be deducted.

My understanding was that I would need to report all rental income that came in (on Schedule E?) and then the expenses would be itemized. I don't see how it would be ok to paper-napkin calculate what my net rental income is by deducting things that aren't reported. But again, maybe I just need a new CPA.

 

[Dean]

How does the saying go? Tax advice on the internet is as valuable as what you pay for it.*

The word I got from my CPA is that the property tax portion of the maintenance fee is all I can deduct.

From DVC info (https://*******.com/financial/dvc-annual-dues/)
Annual dues cover operating expenses (housekeeping, transportation, maintenance, utilities, Front Desk services), administrative expenses (Member Services, member mailings, insurance), refurbishment expenses (updating and maintaining the interior, exterior, and common areas), and real estate taxes (property taxes).

My experience has been unless they're banked points for the previous year, any points you can use or bank you reimburse MF on. This is normally prorated to the points left, but seller paying MF on current UY points are more the exception, I've found.

*I do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

You can only deduct the property tax as a tax deduction but you can deduct the maint fees against any rental income. Assuming one isn't running something as a true business and never using it personally, they can't depreciate it and realistically, they can't rent as a freebee up to 14 days like you can a condo. Here's an article by a very knowledgeable CPA & timeshare person http://tug2.net/timeshare_advice/TUG_Taxes_and_Timeshares.html .