Net Income of TS Rental

[Jimbo Senior Member Find all posts View Profile Close Jimbo]

I have read the TS Rental and Taxes Advice and still have a question.

I bought a TS and wanted to rent it out the first year since we couldn't use it. It is a 2 2BR LO. I have incurred expenses (maintenence fee, advertising, etc.) for the 2007 unit in 2006. I likewise rented 1 of the 2 units out in 2006 for 2007 usage.

In general, is either the income or the expenses considered 2007 or 2006 (income and expense)? If I am on the cash basis of accounting, I would expect that I would record the maintenance fee and advertising as 2006 expenses which offset the income for 2006 of the rental income. Is this logic correct?

If this is correct, would I likewise record depreciation expense for 2006?

Any help, especially from those in the tax business, would be greatly appreciated.

[tonyg Goomba & Super Moderator Find all posts View Profile Close tonyg]

This is not professional, but it sounds about right. Not sure about depreciation being deductible. Maybe Dave M. will drop in and give you the facts.

[Jimbo Senior Member Find all posts View Profile Close Jimbo]

Deposit

Thanxxx Tony for your support.

If you collect a deposit in 2006 for a rental in 2007 is the 2006 amount considered income and the 2007 amount considered expense when it is returned?

OHHHH, the questions I have. Anyone else want to weigh in?

Or does anyone have a way in which they do it although not exactly legit, it does make it easier and more managable? This might be helpful, too.

[Jimbo Senior Member Find all posts View Profile Close Jimbo]

Bumpin' this thread up again.

Any tax men or women out there? If you want to send a PM that would be fine.

[Dave M Senior Member Find all posts View Profile Close Dave M]

Sorry. I missed your post until now.

If I understand correctly, you are renting one 2007 unit and using the other unit for personal purposes. Also, with respect to the rental unit, you either used the 2006 week for personal purposes or you didn't have any use at all because 2007 is your first year of use since you purchased it. I'll respond based on those assumptions. If not correct, please clarify.

The general rule is that rental income received by a cash basis taxpayer is taxable in the year received (2006), assuming your agreement was that the rent was not refundable. Otherwise, if the rent - as of the end of 2006 - was refundable under certain conditions that might arise, you can take a position that it isn't taxable until 2007.

Since you are on a cash basis, you should claim as an expense on schedule E those expenses for 2007 related to the rental unit that you paid in 2006. Generally, that would be limited to maintenance fees and advertising expenses. Since it's the 2007 week that you are renting, your depreciation expense won't be deductible until 2007.

Calculating depreciation: Your depreciation for 2007 will be 3.485% of your tax basis. That percentage comes from an IRS table. If 2007 is the first year of any use for that timeshare, your tax basis is your cost. However, if you have used the timeshare in any prior year for personal purposes (your own or family or friends' use or an exchange), your tax basis for calculating depreciation is much lower - the resale value of the timeshare.

If you have a net loss from the rental in either year, you can't deduct it. That's because the rental of a timeshare or any other real estate for periods of 7 days or less is not considered to be a rental business. (Even most tax advisors are not aware of this rule. Your tax advisor can review §1.469-1T(e)(3)(ii)(A) of the Temporary Income Tax Regulations. This regulation is also referred to in IRS Letter Ruling #9505002, which gives an indication of the IRS position on this issue.) The loss is treated as a "passive loss".

If you have a net profit in either year, it's taxable.

If you have a net loss in 2006, you can carry it forward to 2007 and future years to offset it against rental profits.

Thus, you can see that when renting a timeshare, it's normally a good idea to plan so that all income and expenses fall in the year of the rental.

If anything I have said isn't clear, or if you have more questions, ask away....

[Jimbo Senior Member Find all posts View Profile Close Jimbo]

Dave,

Thanxxx so much! I appreciate the help. I thought I was going to do it right and you confirmed it.

Now another question:

I am attempting to rent out both "sides" of the LO and thus have incurred the total maintenance fee for the 2007 usage period in 2006. Since I have rented only half of the LO and have one half more yet to rent (not going to use for personal use if I can avoid it.) Am I required to divide the maintenance fee, for example, in half since I have only rented one side of the LO? This would effectively increase the net income that I must claim. So, I hope not.

But the other side of the coin is the fact that if I do NOT rent out the other side and use it for personal use, do I have to file an amended return for 2006 to reduce the maintenance fee to 1/2 of the cost for 2007?

What do you think?

[Jimbo Senior Member Find all posts View Profile Close Jimbo]

Forgot to add the question on the refundable deposit. I guess if it is refundable, then based on your response it would be income in 2007 if I keep it.

Am I correct?

[Dave M Senior Member Find all posts View Profile Close Dave M]

Yes, the refundable deposit would be income, if you keep it, at the point in time when you know it belongs to you.

Yes, part of the MF applies to each part of your unit. Whether it's 50-50 or some other split should probably depend on the relative rental values.

If it were my tax return, I would probably get an extension and determine (before filing the return) whether I will rent the other side. That way I will know whether that fee in 2006 was deductible.

Otherwise, make a decision, file the 2006 return and amend later, if necessary.

I'm not sure how you figure "[t]his would effectively increase the net income that I must claim." If you rent both sides, you'll get a full MF deduction. If you rent only one side, you'll get a proportionate deduction.

[Jimbo Senior Member Find all posts View Profile Close Jimbo]

Extension would be the way to go. I think that is a great idea.

Thanxxx for all the advice. I think I have all that I need for filing the taxes.

Thanxxx again, Jim

[brucecz Moderator Find all posts View Profile Close brucecz]

The general rule is that rental income received by a cash basis taxpayer is taxable in the year received (2006), assuming your agreement was that the rent was not refundable. Otherwise, if the rent - as of the end of 2006 - was refundable under certain conditions that might arise, you can take a position that it isn't taxable until 2007.


If anything I have said isn't clear, or if you have more questions, ask away....

Below is a clause that we have in all of our rental agreements.

Quote "The only type or refund that would be allowed is if this unit is uninhabitable as stated in part numbered section seven of this agreement, and no other similar units are available for the same week at this resort." Unquote

Does it meet the condition you memtioned above that Quote "Otherwise, if the rent - as of the end of 2006 - was refundable under certain conditions that might arise, you can take a position that it isn't taxable until 2007." Unquote.

Dave, thank you for your response.

Bruce

[brucecz Moderator Find all posts View Profile Close brucecz]

Calculating depreciation: Your depreciation for 2007 will be 3.485% of your tax basis. That percentage comes from an IRS table. If 2007 is the first year of any use for that timeshare, your tax basis is your cost. However, if you have used the timeshare in any prior year for personal purposes (your own or family or friends' use or an exchange), your tax basis for calculating depreciation is much lower - the resale value of the timeshare.

Dave, can I assume that to keep things simple for now I do not have to take a yearly depreciation as you mention above? For the little amount you mention is IMHO is not a large enough benifit in comparison to what it would ad in extra costs in time and money to pay our accountant to itemize it on our filing .

My reasoning is if we go to sell a ownership then it would be simpler to figure taxable profit or loss if we have do not (if needed, to account for the depreciation taken over the years). Would that be correct ?

Bruce

[brucecz Moderator Find all posts View Profile Close brucecz]

Bump.

Bruce

[Dave M Senior Member Find all posts View Profile Close Dave M]

You definitely should claim depreciation if you are entitled to it. The tax law requires that when selling a depreciable asset, you must reduce the tax basis by the depreciation which was allowable as a deduction, even if you didn't claim it as an deduction! Thus, you should claim the depreciation to reduce your current taxable income or to create a rental loss that could be carried over to future years, eventually to be offset against any gain on sale if you couldn't use the loss against future rental income.

Not claiming depreciation to which you are entitled virtually ensures you will unnecessarily pay more tax than you should - now or in the future or both.

As for your nonrefundable rent question, I think the possibility of a refund is so remote that you could argue the issue either way. I would say that's a question you should pose to your tax advisor, who might have some strong feelings on the issue as it relates to your personal situation. I would probably interpret the issue to my advantage.

[brucecz Moderator Find all posts View Profile Close brucecz]

Dave, thank you so very much. I will be meeting with our accountant this Friday at 1:30 PM. Thanks for explaining the rules in regarding depreciation.

We have had a couple of allowable cancellations of rentals over the years. One cancelltion was Puerto Vallarta got hit a few years ago. Another one was when the CMV indoor pool burnt down.

Bruce

You definitely should claim depreciation if you are entitled to it. The tax law requires that when selling a depreciable asset, you must reduce the tax basis by the depreciation which was allowable as a deduction, even if you didn't claim it as an deduction! Thus, you should claim the depreciation to reduce your current taxable income or to create a rental loss that could be carried over to future years, eventually to be offset against any gain on sale if you couldn't use the loss against future rental income.

Not claiming depreciation to which you are entitled virtually ensures you will unnecessarily pay more tax than you should - now or in the future or both.

As for your nonrefundable rent question, I think the possibility of a refund is so remote that you could argue the issue either way. I would say that's a question you should pose to your tax advisor, who might have some strong feelings on the issue as it relates to your personal situation. I would probably interpret the issue to my advantage.

[mshatty Super Moderator Find all posts View Profile Close mshatty]

We have had a couple of allowable cancellations of rentals over the years. ..... Another one was when the CMV indoor pool burnt down.

Bruce

Makes you wonder why the fire didn't go out with all that water doesn't it?