The Timeshare Tax Trap – 1099-c Question Revisited

Editors Note

Today Sheilah Brust talks about a topic that in the U.S. resurfaces every year. It concerns timeshare debt forgiveness that triggers a tax bill.

This article is not to give tax advice because every tax filer’s situation is unique. If you receive a 1099-C “cancellation” or a 1099-A “abandonment” consult with a tax professional as to the strategy most appropriate for your situation. 

It is tax time again in America and we have already received this year’s first question about one of the most punitive and unfair taxes to be found in the IRS tax universe. Our E.U. friends likely do not have to contend with timeshare tax abuse.

The Internal Revenue Service 1099 form implies that the taxpayer received income and should therefore pay taxes on that income. A lender is required to report the amount of a cancelled debt when the forgiven debt is $600 or greater.

Upon receiving this tax bill, the former timeshare member screams, “What income!?” He or she was left with nothing of value. Say the timeshare loan was for $30,000. The timeshare company took back the points and could resell them for full value. If you bought a boat for $30,000 and defaulted on a $15,000 boat loan, but you kept the boat, you have been enriched by the debt cancellation. There is no enrichment for the timeshare borrower when their debt is forgiven.

If you asked for a loan to be forgiven due to a deceptive sale, to be taxed on money you LOST is a bitter pill. The Florida Alliance for Consumers and Taxpayers conducted a survey of 500 Floridians. Results of the survey show an overwhelming number of those surveyed experienced deceptive sales. A 24-hour “cooling-off” period BEFORE signing a contract has been proposed. TARDA supports this proposal but feels it should be offered, not mandated. Show your support for this pro-consumer action by posting a comment expressing your opinion.

https://thecapitolist.com/survey-floridians-overwhelmingly-support-cooling-off-period-before-signing-timeshare-contracts/?fbclid=IwAR1RW1rO-yPAkN25wP7bCzWXb9tLWKH5wjL2ygRNlgwoQpBrk_fDYtmsKZA

I am a tax preparer. I am also involved with timeshare advocacy, so I have followed the outcomes of dozens of taxpayers disputing this onerous tax for obvious and logical reasons. Unfortunately, the IRS is not always logical. One of our volunteers spoke with an IRS official questioning why this tax is levied when there is no “income” for the timeshare member. The response from the IRS official: “We’re not going to change it because it’s easy to get money out of old people.”

IRS form #982 is the form that the IRS advises should be filed with the income tax return to explain that the taxable amount listed on the 1099-c is acknowledged, but should be excluded from the taxpayer’s gross income. It is reasonable to argue that in many cases there should be no taxes imposed after being released from a timeshare contract. This is one explanation example:

“This debt was for timeshare points. The points have no dollar value to anyone but the timeshare developer. The company took back all the points from this sale (pertaining to the 1099-c) plus all other points that we had paid for in full. The amount of paid-in full purchases was approximately $200,000. We are left with nothing of value, no points or any ability to be able to utilize points. The company feels (for example) the fair market value, as indicated on the 1099-c, was $40,000 for the points that they took from us pertaining to one sale. We paid/lost ($200,000) on other purchases that were paid in full that were also taken back. This should justify no tax liability. The timeshare developer can turn around and sell the points for whatever price the market will bear.”

If you have already paid the tax, you can file an amended return should you wish to dispute the tax.

Attorney Mike Finn is someone I spoke with about my timeshare. Mike’s take on this troublesome tax is that a timeshare loan is not a real mortgage. He agrees no income has been generated. According to Mike:

“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 and should be counted as income because of 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 the same would be logical.

It’s evident that the cancelled timeshare 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. 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.

Every tax filer is unique, with differing facts and circumstances. We are not offering tax advice. Consult with a professional.

At Tax Time – A Final Kiss Goodbye

https://www.finnlawgroup.com/learning-center/tax-time-contract-cancellation-timeshare-developer

Contact After Inside Timeshare or TARDA if you have questions or concerns about your timeshares. We are not qualified to give legal advice, but there are attorneys across America who have generously donated their time to answer questions our volunteers are not qualified to answer.

For more information about Timeshare and Resort Developer Accountability Inc., you can reach us through our “Contact Us” tab. Articles about current and former timeshare members and owners can be found at the bottom of the home page along with our donate button. Donations are appreciated. They are not tax-deductible for a 501c4 nonprofit. https://tarda.org/

Next week TARDA board member Irene Roberts will address pending proposed legislation that would eliminate hard copy documents, including the Public Offering Statements. Documents would only be provided digitally, like on a tablet that members often complain doesn’t work. The timeshare buyer would be required to order a hard copy. It’s hard to fathom how this could be considered a pro-consumer measure. The buyer is likely on vacation with the family. Timeshare loans are financed at 12% to 19.99% and there is little to no resale value. Most state-mandated Public Offering Statements state on the cover “READ CAREFULLY BEFORE SIGNING.”

Thank you and welcome Sheilah to AIT and also for your contribution which explains a great deal, especially for our European readers who as you said don’t suffer from this type of abuse.

So that is another week over and the weekend beckons, no doubt “Baby Dog” has his own ideas to keep me busy, have a great weekend.