It has been a difficult few years financially for much of America due to the COVID-19 pandemic. One bright spot during that time may have been an agreement with your timeshare developer agreeing to go your separate ways. Or, you are still trying to recover from the financial impact of the COVID-19 pandemic and were notified that your developer canceled your membership or foreclosed in satisfaction of the debt. Finally, the apparent financial bleeding has stopped, and your financial situation is looking up.
You go to the mailbox, feeling like you are getting a handle on your finances and might be able to start paying down so debt. Unexpectedly, you find another letter from your timeshare developer and rip it open. It is an unexpected present, an IRS 1099 form, either “A” or “C”. This form says that it must be filed with your taxes because your timeshare developer has already sent the IRS a copy.
Your stomach drops, and you wonder what does this mean? The form lists several numbers like the “outstanding principal balance”, or the “amount of debt discharged”, and the “fair market value of the property.” These numbers could be significant or as low as $0. It seems, per the document, your former timeshare developer is telling the IRS that this is the amount of money they have been generous enough to forgive you. The 1099 lists the amount you would have paid out to your timeshare over the life of the loan had you kept possession of your timeshare. You wonder why this is any of the IRS’s business and how it will impact your taxes?
Unfortunately, this form is an unanticipated and nasty surprise that brings its own potential financial crises. The IRS typically treats debt that has been forgiven as income, so you may now be responsible for paying taxes on this potentially colossal figure. For example, the amount of debt forgiven is reported as $50,000.00, and you fall in the 20% tax bracket. Your new added tax bill is $10,000.00! This amount may wipe out the tax refund you were counting on to help with expenses or increase your tax liability, and the entire amount is due by April 15th. The relief you felt getting out of your timeshare is now replaced with concern over how you will pay the IRS.
So you are now looking for a solution and trying to figure out if you are stuck with the tax bill for so-called income? This situation can be particularly stressful if you lost your timeshare due to existing financial hardship. Like many complicated issues, the correct answer in your case may require extensive investigation and depend on your individual circumstances.
This post aims to give you some hope, things to consider, and stress the need to consult a tax professional before you shoulder the burden of thinking that because you received a 1099 form from your timeshare developer, you are automatically staring down a huge tax liability.
Before sharing our thoughts, please understand that we are not providing tax advice, merely some possible issues and suggestions that you can speak about and explore with your tax professional. We are also compelled to share that we are not licensed to provide tax advice, so although we have dealt with this issue and spoke with licensed tax professionals, our knowledge may be outdated and should not be relied upon for an issue as significant as this. Our expertise is as lawyers focusing on the litany of tasks involved with extricating our clients from their timeshare contracts, not preparing their tax returns. Please, take your tax preparation advice only from your own qualified tax preparer, which we cannot stress enough. If you don’t currently have a tax professional or your tax professional has never dealt with this issue before, now may be an excellent time to consider hiring a professional who has successfully dealt with this issue before.
Now that we have disclosed our limitations, we will provide some of our personal conclusions and suggestions that we invite you to share with your tax preparer. Again, we are doing this with the admonishment that we are only advancing theories as every tax filer’s situation is different and unique. Nothing we discuss should be considered offering tax advice and should not be interpreted as tax advice.
Over the past five or six years, innumerable O’Grady Law Group clients have received IRS 1099 forms, both of the 1099A and 1099C variety, and various other IRS forms. These forms have often created confusion and disruption, particularly for people planning to file their tax returns early in hopes of expediting their refund. They have also caused some consternation for tax professionals who have not dealt with a 1099 from a timeshare developer.
If you find yourself in this situation, I would direct you to IRS form 982. IRS form 982 is the document that the IRS advises should be filed along with your tax return which tells the IRS you acknowledge the income from the discharged debt on the 1099 form, but you qualify for an exception, so this amount should not be included in your gross income. IRS form 982 lists a host of potential reasons that the discharged debt can be excluded from your gross income, which are on their own confusing.
To see if you qualify for one of these exceptions, you have to look at IRS Publication 4861, which explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments. Here is where we can argue why certain forms of debt forgiveness may well be taxable income versus the act of canceling a timeshare and why it should be treated differently.
“Income” typically means a measure of money, property, and other transfers of value that an individual receives over a set period, which increases their wealth or net worth. So when a debt is discharged combined with keeping possession of the item the debt was incurred for, net worth or wealth increases. Using this definition, it makes sense to treat discharged debt as income.
However, when applying this definition of income to the cancelation of a timeshare and the related debt, it is immediately apparent that there is a difference. When a timeshare is canceled, the owner retains nothing of value because it was given back in exchange for a debt waiver. Indeed, they have lost everything they have paid for the timeshare, which they no longer own, which reduces their wealth or net worth. Consequently, any argument that they have realized or retained any income or anything of value because the timeshare contract has been canceled is clearly not accurate.
Suppose you have been unable to make payments, and your timeshare developer takes back your points or forecloses. In that case, things may be a bit more straightforward. The IRS looks at the amount of outstanding debt versus the property’s fair market value. If the fair market value of the timeshare is more than the amount of debt immediately after the transfer of the property, there should be no tax liability. If the debt is greater than the fair market value, you will have to look at the other exceptions on Form 982.
In conclusion, we have attempted to avoid this post becoming too technical regarding reporting requirements other than to suggest that you will probably need to file a 982 form. We would also strongly recommend using a professional tax preparer as these forms are confusing. Lastly, if you are currently facing this issue and do not know whom to turn to, we invite you to contact our office, and we will be more than happy to be of assistance.