Claiming Depreciation on Rental Income (Taxes)

[CanadaDisney05]

We started going down this path in another thread, but I figured it would get more direct traffic in it's own thread. I've seen a couple of threads, where people say that you cannot claim depreciation of the purchase price on rental income because there are specific rules for timeshares. Does anyone have a link to something official from the IRS? I have not been able to track anything down.

In my uneducated opinion, I would assume that because DVC is a right-to-use (instead of deeded) timeshare, it would be similar to any other lease. Unlike a deeded timeshare where you own a stake in the property indefinitely, a right-to-use timeshare is effectively a lease to use the property for a period of time based on the point charts. You wouldn't be able to deduct depreciation using the IRS depreciation table (because you don't really own anything), but you should be able to recover the cost paid per point leased. In other words, if you paid $20,000 for a 150 point contract that had 25 years remaining, you effectively leased 3,750 total points for $20,000, or $5.33 per point. It would only make sense that you can claim $5.33 per point on top of the per point maintenance fees you paid.

At the end of the day, you paid X + 25Y = Z for the right to use that property for a period of time, where X = upfront cost, Y = maintenance fees, and Z = Total Cost. It would be illogical if you can deduct Y but not X.

Edit:

From the link below, I found the following quotes interesting

https://www.irs.gov/publications/p527#en_US_2018_publink1000218995

Rental of property.

You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.

Personal use of rental property.

If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home).

A dwelling unit doesn’t include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and isn’t used by an owner as a home during the year.

Property used for personal purposes.

If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home.
Not used as a home.

If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Because you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . The expenses for personal use aren’t deductible as rental expenses.
Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3.

 

[TAX GUY]

Are you actually renting out your vacation club? There isn't anything to depreciate, as you mentioned. I have a client that rents out a time share they have. He is too sick to use it, so they put it in a pool to be rented. They include the rental income, offset by the cleaning and maintenance fees for those weeks only, plus the commission fee paid to the agent. There is no real property.

 

[CanadaDisney05]

Are you actually renting out your vacation club? There isn't anything to depreciate, as you mentioned. I have a client that rents out a time share they have. He is too sick to use it, so they put it in a pool to be rented. They include the rental income, offset by the cleaning and maintenance fees for those weeks only, plus the commission fee paid to the agent. There is no real property.

I'm not actually renting it out personally. More curious of implications.

Regarding DVC, there isn't anything to depreciate, but you are technically leasing the points. You paid an upfront lease cost to give you the access to the points for a specified duration of time. The lease still requires you to cover maintenance costs. Shouldn't this lease be deductible? It is part of the cost of renting those points. You wouldn't have access to those points if you didn't pay for them.

IMO, it would be similar to a sublease. I pay $1000 a month to rent an apartment. I then go ahead and rent that apartment to you for $1,200 a month. I pay $100 per month of upkeep. My net profit is only $100 per month, not $1,100 per month.

 

[TAX GUY]

This is a temporary (less than 14 days) "rental". See the rules regarding vacation home.

 

[Chuck S]

I received an email from my CPA just the other day on vacation home type rentals, this will apply to federal taxes, state taxes may vary, as we don't have state income tax in Texas:

1.Rent out your property tax-free. If you have a cabin, condo, or similar property, consider renting it out for two weeks. The rental income you receive on property rented for less than 15 days per year is not considered taxable income. In addition, you can still deduct your mortgage interest expense and property taxes in full as itemized deductions!. Track the rental days closely — going over 14 days means all rent is taxable and rental income rules apply.

Now, I wonder if this also applies to me, since my regular business is rental properties, does it apply per property, as my other tenants are regular year round tenants.

 

[_auroraborealis_]

I received an email from my CPA just the other day on vacation home type rentals, this will apply to federal taxes, state taxes may vary, as we don't have state income tax in Texas:

1.Rent out your property tax-free. If you have a cabin, condo, or similar property, consider renting it out for two weeks. The rental income you receive on property rented for less than 15 days per year is not considered taxable income. In addition, you can still deduct your mortgage interest expense and property taxes in full as itemized deductions!. Track the rental days closely — going over 14 days means all rent is taxable and rental income rules apply.

Now, I wonder if this also applies to me, since my regular business is rental properties, does it apply per property, as my other tenants are regular year round tenants.

Right, but DVC is not a cabin, condo or similar.

 

[jlb727]

A dwelling unit doesn’t include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and isn’t used by an owner as a home during the year.

IMO, this section is what disqualifies DVC from what you’re talking about.

 

[Chuck S]

Well, that makes sense. But, I haven't rented my DVC Points so far, but that is good to know for the future, if I do.

 

[miTnosnhoJ]

My understanding is that if you can itemize, you can deduct the property taxes that are part of your dues.

This becomes important if you are renting out points, because you cannot double count this deduction. If you deduct the property taxes, you cannot deduct them again to offset the rental cost. However, you can reduce the rental income per point by the maintenance fees you paid on those points (less the portion that goes to taxes).

But if you are not itemizing and claiming the property tax, you should be able to deduct the entire maintenance fees for those points.

in previous years, the timeshare rules were more clear and easy to find in the IRS publications. With last year’s tax law changes, it is more difficult to find. I don’t think the timeshare rules were repealed, but I could be wrong.

 

[Dave Hollywood]

If Disney raises the points per night in your home resort, doesn't that depreciate the value?

 

[crisi]

Right, but DVC is not a cabin, condo or similar.

There is an IRS letter that specifically excludes timeshares.. You'd need a subscription to something like Lexis to access it.

 

[crisi]

If Disney raises the points per night in your home resort, doesn't that depreciate the value?

That has nothing to do with depreciation for tax purposes, which is moot anyway because you can't write off DVC depreciation.

 

[crisi]

Here is an example of what is deductible.

https://ttlc.intuit.com/community/i...t-the-income-and-if-i-report-it-do-i/00/73371
This says depreciation is deductible, but the problem with DVC is that you are renting the unit on a long term lease. Disney is deducting the depreciation on their taxes and you can't double dip. Which is one of the reasons Disney does a long term lease.

 

[BillPA]

Do you really want the IRS to look that closely into you?

 

[crisi]

Do you really want the IRS to look that closely into you?

That's the other issue. While the IRS denies the existence of audit triggers, most tax accountants believe there are some things that may cause the IRS to take a more careful look at you - one of those things being vacation home rental.