Welcome to The Tuesday Slot, this week Irene Parker looks at the question which is rather unique to the US, it is something we in Europe do not have a problem with. Irene also includes a very good explanation from Attorney Mike Finn.
The Timeshare Tax Trap
By Irene Parker
February 26, 2019
Inside Timeshare has heard from 719 timeshare families. Of the 719, 98 are veterans and active duty service members. All but a handful allege unfair and deceptive timeshare sales practices. The most common complaint is being told you can pay your maintenance fees using points when programs as described do not exist. Others report being assured their timeshare could be sold only by purchasing additional points.
It’s bad enough to be lied to, suffer the frustration of groveling before customer services representatives who dismiss your complaint with “You signed a contract,” then undertake the arduous process of filing regulatory, and in some cases, law enforcement complaints. After you think it is finally over and done with, you get one of these 1099Cs in the mail after your timeshare loan has been cancelled, Blood pressure rises again.
We can’t give tax advice, so we rely on professionals to point you in the right direction. We published information on how to dispute phantom income last year on April 6. Given we have already received many questions about this pesky form this current tax season, we are publishing earlier this year hoping to calm our readers before receiving an IRS form 1099-C.
Here’s the word from the professionals:
1099-C: Cancellation of Debt
At the time the seller/borrower obtained the loan to purchase or refinance the property, the loan proceeds were not included in taxable income because the borrower had an obligation to repay the lender. When that obligation to repay the lender is forgiven or cancelled, the amount that is not required to be repaid is considered income by the IRS. The lender is required to report the amount of the cancelled debt to the borrower and the IRS on Form 1099-C, when the forgiven debt is $600 or greater.
Excerpt from attorney Mike Finn’s Learning Center article on timeshare loan forgiveness:
The 1099 form is referencing a large amount which may very well be taxable income! Unlike the mortgage balance forgiven, which would have been spread out over the life of the loan, this possibly taxable sum has now been reported to the IRS all at once, in one lump sum! Say the amount reported is about $25,000. Say further that your tax bracket is 20%, a rate on the lower end of the scale. Your new added tax bill is $5,000, and it’s all due by April 15th!
Consult with a tax professional before you assume that your receipt of a 1099 form from a timeshare developer automatically means you’re staring down significant tax liability.
Please understand we are not providing tax advice, merely a possible position that we believe is quite tenable and may be worth exploring with your own tax advisor. Although it’s accurate for me to state that I was a Certified Public Accountant, it is much more important to note that my C.P.A. licensure has long ago lapsed (because I didn’t choose to keep up with the annual professional education courses necessary to retain my certification). Please take your tax preparation advice solely from your own qualified tax return preparer.
Every tax filer is unique, with differing facts and circumstances. I am not offering, nor should you interpret my comments, as tax advice.
The receipt of these 1099 forms creates confusion.
I point you to IRS form #982. This is the form that the IRS advises should be filed along with the income tax return itself as a form of supporting schedule, which provides notification to the IRS that the amount presented to them via a 1099 is being acknowledged, but further, that the amount listed should be excluded from the taxpayer’s gross income. The myriad of possible reasons provided on the 982 form are in and of themselves confusing and difficult to understand. I’m therefore providing my readers what I suggest may be appropriate reasoning in concluding that, in many cases, there should be no “income tax penalty” imposed after successfully negotiating a release of contract with your timeshare resort.
Allow me to provide my argument as to why some forms of debt forgiveness may well be construed as taxable income, and then differentiate the negotiated act of cancelling a timeshare contract and why this transaction therefore logically should be treated differently.
Since “income” generally means a measure of accretion of wealth or value added to your worth, then the cancellation of a debt, when that debt was incurred when you received something of value, should be counted as income because the elimination of the debt liability plus the retention of the item acquired when the debt was incurred increases your net worth. Under this definition of added wealth, the taxing of same would be quite logical.
Applying this argument to the cancellation of a timeshare contractual obligation and its related underlying indebtedness, it’s immediately evident that the cancelled owner has retained absolutely nothing of value. They’ve surrendered their interest in exchange for a debt and/or contract cancellation, but after the transaction they have absolutely no accretion of net worth.
In terms of taxpayer reporting requirements, the issue becomes murkier when you apply it to timeshare transactions. Whether or not the industry will ever acknowledge that the resale value of a timeshare interest is minimal at best, what we can establish is that it would be extremely unusual for anyone other than the resort developer to acquire the timeshare interest at foreclosure, and therefore the liquidated basis of the interest will nearly always be zero, or at best a nominal value at foreclosure. Also making the timeshare transaction more complex in terms of following the instructions of either IRS form 982 and/or publication 4681 relating to this issue is determining whether the underlying debt should be viewed as “recourse” or “non-recourse,” given the propensity of the developers to utilize non-recourse based non-judicial foreclosures to recover the interest the greatest majority of the time.
I’ve intentionally attempted to avoid becoming overly technical in terms of specifically advising of taxpayer reporting requirements other than to suggest very generally that the filing of the IRS form 982 will most probably be required. Lastly again, I do most strongly recommend utilizing a professional tax return preparer, as these forms are not at all intuitive.
I earnestly wish that I could offer something less complex to help provide absolute answers to this prominent issue, but I do feel that this is important because the financial ramifications are potentially high.
Once again, thank you to Mike Finn for his experienced advice. Contact Inside Timeshare if you have a timeshare concern or a story to share. If we don’t know the answer we will find someone who does.
Self-help groups we feel are not industry influenced:
We seek to provide timeshare members a way to proactively address membership concerns; to advocate for timeshare reform; to obtain greater disclosure from the company; to advocate for a viable secondary market; and to educate prospective buyers.
Thank you Irene for this article and thanks to Mike Finn for his contribution, as usual you explain things in a way that us mere mortals can understand.
If you have a problem with your timeshare, have been contacted by any company offering you what looks like a very simple solution, but are not sure if they are genuine, than use our contact page and we will point you in the right direction.