What is the federal income tax liability for renting points?

[JPC]

Is it all taxable or is there an exclusion for renting out your property for less than 15 days a year?

http://www.irs.gov/taxtopics/tc415.html

Topic 415 - Renting Residential and Vacation Property (formerly Renting Vacation Property and Renting to Relatives)

If you receive rental income from renting to others a dwelling unit, such as a house or an apartment, you may deduct certain expenses. These expenses, which may include interest, taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that is taxed. You will generally report such income and expenses on Schedule E, Form 1040 (PDF). If you are renting to make a profit and do not use the dwelling unit as a home, your deductible rental expenses can be more than your gross rental income, subject to certain limits. For information on these limits, refer to Topic 425, Passive Activities – Losses and Credits. However, if you rent a dwelling unit that you also use as a home, your deductible rental expenses are subject to stricter limitations.

You are considered to use a dwelling unit as a home if you use it for personal purposes during the tax year for more than the greater of: 14 days or 10% of the total days it is rented to others at a fair rental price. It is possible that you will use more than one dwelling unit as a home during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a home. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a home unless you rent your vacation home to others at a fair rental value for more than 300 days during the year.

A day of personal use of a dwelling unit is any day that it is used by:

You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home under a shared equity financing agreement;
A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price;
Anyone under an agreement that lets you use some other dwelling unit; or
Anyone at less than fair rental price.

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. However, you will not be able to deduct all your expenses of rental use if your rental expenses exceed your gross rental income. If you itemize your deductions on Schedule A, Form 1040, you may still be able to deduct mortgage interest, property taxes, and casualty losses on that schedule.

There is a special rule if you use a dwelling as a home and rent it for fewer than 15 days. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses.

Another special rule applies if you rent part of your home to your employer and provide services for your employer in that rented space. In this case, report the rental income, but do not deduct any expenses as rental expenses.

Refer to Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

 

[Caskbill]

Well to be certain you need to check with the IRS, but this has been discussed in the past and if I recall correctly it turns out that 100% of your rental income is taxable.

The 15 day exclusion applies to something you own totally such as a vacation home. That rule doesn't apply to time shares.

 

[dianeschlicht]

I think that is correct, Bill. It is 100% of the income that is taxable.

 

[joepoe]

100% taxaxble? You cannot deduct maintenance fees? That does not sound right.

 

[Dean]

It's reportable and you can reduce your income by deduction applicable direct costs like maint fees, phone calls, postage and the like. I suppose you could also depreciate it and deduct any interest, if you used it almost exclusively as a rental. As for the 2 weeks or less a year, I don't think it's cut and dried. I admit it would be difficult to meet the requirements with a timeshare but not impossible. I do think few would be able to come under this clause but it does not automatically exclude timeshares from what I can see.

 

[JudyS]

This question has been discussed extensively on the Timeshare Users' Group at www.tug2.net One of the moderators there, DaveM, is an accountant and is an expert on tax issues involving timeshares.

There's two issues here. The first issue is, can one count a timeshare as a home, and therefore exclude rental income if one rents for less than 15 days? (The tax code says, "There is a special rule if you use a dwelling as a home and rent it for fewer than 15 days. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses.") DaveM says that yes, one can count a timeshare as a home. But, note this rule from the tax code: "You are considered to use a dwelling unit as a home if you use it for personal purposes during the tax year for more than the greater of: 14 days or 10% of the total days it is rented to others at a fair rental price." So, this means that, order for a timeshare to count as a vacation home, one must stay in it (or use it for other personal purposes) for at least 15 days in the year that you rent it, in . With a traditional weeks-based timeshare, this would be quite difficult -- you'd have to own 3 weeks at the resort so you could stay there 15 days, plus own whatever weeks you planned to rent. With a points-based timeshare like the DVC, staying 15 days in one year -- and still having points left over to rent -- is easier because you can borrow and save points.

The second issue is, "When figuring your net rental income, can you subtract fees and depreciation on your timeshare?" The answer here is also yes. DaveM says that for a RTU, depreciation should be purchase price divided by number of years on the RTU at the time you purchased, assuming that the first year you rented the timeshare, its fair market value was at least as much as you initially paid for it (which is certainly the case with the DVC, but not with many other timeshares.)

There are a couple of special issues with the DVC, that I don't know the answer to. If one rents points by transferring them to another DVC member, I don't know how one would calculate how many nights one had rented. Also, to get the minimum 15 day stay, I'm not sure if one could count nights spent at a DVC resort that was not one's home resort.

If you go to TUG and look on the Buying, Selling, Renting board, you should find information on this topic. DaveM also has an article about this under the advice section.