Tax income from renting dvc points?

[DianaMB333]

Hi.. if i would like to rent the points to somebody else.. do i have to report the amount as income for tax purposes? (I heard that only if the rent was equivalent to 14+nights.. ?).. thanks

 

[_auroraborealis_]

In the US, yes. There is no minimum to report, as is true with any income per federal law.

 

[chalee94]

You are allowed to deduct annual dues on the points you rent. Going farther than that is more aggressive than I would recommend but opinions vary. You can roll the dice and take your chances.

 

[DianaMB333]

Oki.. I was born in Colombia and live in Mexico.. so renting points would imply some tax validation here... thanks

 

[DianaMB333]

Has anyone had the experience?

 

[GoingSince1990]

You can deduct operating expenses and taxes (provided that you're not already deducting the taxes elsewhere on your tax return). You cannot deduct the capital reserve charge; that would be added to your basis and deducted from the capital gain from any eventual sale. I also deduct depreciation of the points I rent, which seems fair because after all the value of a DVC contract does depreciate to zero at some fixed point in the future. I have never seen any guidance on how to calculate depreciation but I do it by calculating the overall cost per point CPP by dividing the total price I paid for the contract by the product of the number of points in the contract and the number of years remaining in the contract at the time of purchase. I then calculate the depreciation for the rental as CPP multiplied by the number of points I am renting out.
As an example, say you paid $25,000 for a 200 point contract that had 50 years to run. Then CPP = $25000/(200*50) = $2.50. So if I rented out 100 points, along with the operating expense and taxes I would also deduct $2.50*100 = $250 as depreciation. I have been doing it this way for quite a few years now and the IRS has never complained. Of course the obligatory disclaimer applies that nothing I have said should be construed as professional advice and you should consult your own accountant and/or tax attorney.

 

[chalee94]

I also deduct depreciation of the points I rent... I have been doing it this way for quite a few years now and the IRS has never complained.

I believe that you can only deduct depreciation if the property is exclusively held as a rental.

The question is how your position would hold up if the IRS decided to audit you. Since there is a clause in your DVC membership that forbids owning for commercial purposes (i.e. that you may not buy DVC to use exclusively as a rental), I suspect they would easily object to your position and consider it an invitation to carefully dig further to see what sorts of other "aggressive" positions you might have decided to take...

Like I said, you take your chances...

 

[GoingSince1990]

I believe that you can only deduct depreciation if the property is exclusively held as a rental.

The question is how your position would hold up if the IRS decided to audit you. Since there is a clause in your DVC membership that forbids owning for commercial purposes (i.e. that you may not buy DVC to use exclusively as a rental), I suspect they would easily object to your position and consider it an invitation to carefully dig further to see what sorts of other "aggressive" positions you might have decided to take...

Like I said, you take your chances...

IRS says:

If you place property in service in a personal activity, you can’t claim depreciation. However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. You place the property in service for business or income-producing use on the date of the change

https://www.irs.gov/pub/irs-pdf/p527.pdf

 

[chalee94]

So you are claiming that you have converted your DVC ownership exclusively to business use going forward? That IRS section is not talking about bouncing back and forth willy nilly between personal and business use...

But besides that, here is the section of your DVC agreement that the IRS will bring to the court's attention by your claim of "business use":

Commercial Use Policy. The Disney Vacation Club (DVC) Public Offering Statement makes it clear that DVC memberships are intended for personal vacation use. The Declaration of Condominium and the Membership Agreement for the Resort expressly limits the use of Ownership Interests to personal use and prohibits use for commercial purposes, a pattern of rental activity or other occupancy by an Owner that the Board of the Association, in its reasonable discretion, could conclude constitutes a commercial enterprise or activity.

 

[GoingSince1990]

So you are claiming that you have converted your DVC ownership exclusively to business use going forward? That IRS section is not talking about bouncing back and forth willy nilly between personal and business use...

But besides that, here is the section of your DVC agreement that the IRS will bring to the court's attention by your claim of "business use":

The DVC explicitly allows members to rent their points, and there is a thriving rental market, both privately and through brokers, with some major brokers issuing 1099s each year for rental income. Disney has explicitly stated that they will not raise any objections unless a member makes more than 20 reservations in a 12 month period.
https://dvcnews.com/index.php/dvc-p...commercial-renting-limitations-amended-to-pos

 

[jerseyduke]

Sounds like raising a red flag with the IRS to save 75 bucks in taxes to me....... (deducting the depreciation). I wouldn't do it.

 

[chalee94]

The DVC explicitly allows members to rent their points, and there is a thriving rental market, both privately and through brokers, with some major brokers issuing 1099s each year for rental income. Disney has explicitly stated that they will not raise any objections unless a member makes more than 20 reservations in a 12 month period.
https://dvcnews.com/index.php/dvc-p...commercial-renting-limitations-amended-to-pos

DVC does allow renting. You are not just saying that you are renting, though. You are claiming "business use" to reduce your taxable income with deductions for depreciation.

So post number 11 in this thread is a bit of a non sequitur. DVC does not allow commercial use. That's the logical point of the argument that you are missing.

 

[GoingSince1990]

DVC does allow renting. You are not just saying that you are renting, though. You are claiming "business use" to reduce your taxable income with deductions for depreciation.

So post number 11 in this thread is a bit of a non sequitur. DVC does not allow commercial use. That's the logical point of the argument that you are missing.

I appreciate you taking the time to provide your thoughts on the IRS regulations and DVC rules. Reiterating what I said earlier, nobody should act on tax matters based upon what they read in an internet forum, and should consult a tax professional for advice on their specific situation.

 

[CraigInPA]

The agreement between DVC and its members is only enforceable between DVC and its members. The IRS, as a third party, cannot utilize the "no commercial use" clause to further its claim that you should be denied depreciation, because it is not a party to the contract. The reasoning in law is a third party cannot know every consideration being made in a contract between two other parties, so it cannot gain benefit of that contract as a party not involved in the contract.

The "no commercial use" clause is meant to prevent you from booking a room and turning it into a bar or gift shop, for example, and not as a barrier to renting a room reservation for the normal purposes of occupying the room (which is explicitly permitted in the contract).

The tax code permits one to depreciate property held for income producing purposes. You can depreciate the acquisition value over its lifetime. You also get to deduct the maintenance and taxes paid to maintain the property as expenses, although some expenses should also be depreciated. If you sell it for an amount higher than the depreciation already taken, you will have to declare a profit on the amount remaining. This is for business strictly used for income producing purposes. Property held for personal use is not afforded depreciation.

I recommend anyone considering depreciating a timeshare to consult with a specialist tax attorney because normal business property depreciation rules may not apply to a timeshare.

 

[DianaMB333]

Any international owner has had the experience of renting out points? I don't file/pay any taxes in the US but I am curious to know if only by renting the points I will have to.. thanks..

 

[CanadaDisney05]

Any international owner has had the experience of renting out points? I don't file/pay any taxes in the US but I am curious to know if only by renting the points I will have to.. thanks..

No experience, but I plan on using David's if I ever have to. They are based in Canada (and clearly so am I). I asked them and they said they don't report anything to the US. I would just have to self declare any income with CRA

 

[CanadaDisney05]

I don't know specific IRS law, but if they claim that renting out personal property is considered "income", then all "expenses" (using the accounting definition) associated with earning that income should be allowed as a deduction.

I can see in a traditional timeshare model how deducting depreciation can be open to all sorts of grey. Depreciation isn't linear. What's the cost basis on the day you rent it out? In Canada, we also don't use linear depreciation for tax purposes, so assuming it's the same in the US opens up a lot more grey.

DVC is a different animal though. I bet you can make a pretty good case, that your not actually deducting depreciation. Your deducting a prepaid expense (which should be allowed). DVC is not really capital property in the traditional sense. You don't own anything. All you own is the right to use a specific property for a predefined period. Your prepaying for that right. That's a lease, not ownership.

Even if you were to fall under audit, and lose, I cannot for the life of me imagine having any major impact. Of course you'd have to pay back what you would have paid otherwise. Maybe some small interest. Doubt they would force you to pay any penalties considering it's an honest mistake.

 

[_auroraborealis_]

I don't know specific IRS law

There is basically nothing in IRS rules that provides a universal allowance to deduct all expenses. It's a nice idea, but you underestimate the complexity of most tax rules in the US.

Even if you were to fall under audit, and lose, I cannot for the life of me imagine having any major impact. Of course you'd have to pay back what you would have paid otherwise. Maybe some small interest. Doubt they would force you to pay any penalties considering it's an honest mistake.

There would be penalty.

 

[CanadaDisney05]

There is basically nothing in IRS rules that provides a universal allowance to deduct all expenses. It's a nice idea, but you underestimate the complexity of most tax rules in the US.

You cannot deduct "all expenses". But I am pretty sure you are allowed to deduct all reasonable expenses that can be justified that they aided in the production of the income that they are being deducted against. There is no golden list that outlines these. It's a matter of case law. If you were to be questioned on it, you would have to justify it to the auditor that you would not have been able to earn the income without incurring the expense. In this case, I think it would be pretty easy to prove.

There would be penalty.

If you made a reasonable case, but were eventually denied, it would be pretty easy to get them to wipe any penalties. This is not a case where you're clearly trying to deduct unreasonable expenses. This is a technicality, without any clear guidelines, and you tried your best. Having said that, you would still be on the hook for any interest.

FWIW, I would personally deduct it until I was told I cannot. But that is based on my personal risk tolerance, and my own comfort/experiences in dealing with IRS auditors.

 

[MICKIMINI]

I choose to pay income tax on the full amount as I agree with OP's - it's just not worth tangling with the IRS. The online tax service I use has specific info on how to add this income and I make sure I have a good record of the rentals and payments to my checking account. I had lots of additional points last year and four rentals. Additionally, there are several options with the online tax service and it is a little more money to have a tax professional intervene if audited which I think is worth it.