Although there are many legal and financial aspects to consider in these types of transactions, the income tax consequences should be on the top of the list of considerations so that all parties involved can be informed and understand what the impact may be to them.
Many legacy resort owners’ associations that are positioned to or have already terminated the timeshare plan have already accepted substantial unit inventory from members in the settlement of delinquent assessments. In some cases, this inventory is sold by an association to a bulk buyer or to other owners. The tax considerations of a termination of an association can be different for the party owning the assets whether it is the Association, individual owners, or a third-party bulk owner.
Associations realize taxable income or loss equal to the difference between its selling price and its tax basis. The Association may not have much basis in the inventory itself to act as a reduction of the sales price and could face significant taxable income which is taxed at different rates and under varying rules depending on whether the association elects to be taxed as a homeowner’s association or as a regular corporation.
Other owners generally consist of those that are holding units for personal use, rental or resale.
Owners holding units for personal use who dispose of their units recognize any gain as taxable and any loss as a nondeductible personal loss. Owners holding units for a rental will recognize taxable gain or loss. If a gain, such gain may include depreciation recapture and IRC Section 1231 Gain which is taxable at capital gain rates. Owners holding units for resale are treated as dealers for tax purposes and any income or loss realized upon sale is treated by them as ordinary income or loss.
The transaction would likely require these owners to receive a 1099-S for the sale. Further, if the owners are foreign, there could be backup withholding issues under the Foreign Investment in Real Property Tax Act (FIRPTA). Regardless, there are documentation and tax compliance considerations here that should be carefully reviewed and adhered to.
When distributing the net sale proceeds to owners, the distribution agent must be cognizant of these reporting and withholding requirements, and the legal status of the parties to whom the funds are being distributed. If it’s a corporate entity receiving the distribution, is it a valid entity and is the individual to receive the distribution clear? Is the timeshare week held in a Trust, or if the owner is deceased, has the estate been probated? Failure to understand these factors may expose the distribution agent and the Board of Directors if the association is the designated trustee, to liability and delay or jeopardize the distribution process overall.
Planning Ahead is the Key to Success
The association’s board of directors needs to understand its options and prepare for the termination and property sale years, not months, in advance. Amendments to the governing documents that may provide for the more favorable tax treatment of the sale and a more efficient termination and sale process must occur prior to the sunset date. If a judicial partition is desirable or required, the timing of the disposition of assets and liabilities must be considered. Helping the owners prepare themselves for the post-sale distribution by addressing their ownership status will benefit all of the owners. The process should be by and for the benefit of the owners, and the board’s duty to serve their owners properly starts with getting the proper tax, title, and legal guidance.
No two timeshare terminations and subsequent liquidation of assets are the same and have exactly the same set of facts, circumstances, and tax consequences. Each transaction should be looked at carefully and evaluated for tax impacts so that all parties can be fully informed as to what the impact will be to them and be prepared when the transaction occurs.
Withum is a forward-thinking, technology-driven advisory and accounting firm, committed to helping clients in the hospitality industry be more profitable, efficient, and productive in the modern business landscape. For further information about Withum and its hospitality services team, contact Lena Combs (LCombs@Withum.com) at (407) 849-1569, or visit www.withum.com.
ABOUT LEMONJUICE SOLUTIONS
Lemonjuice’s mission is to bring fresh perspectives and options to the timeshare industry and legacy resorts. With decades of timeshare management and development experience, legal restructuring and title underwriting expertise, innovative technology, and investment capital, the Lemonjuice team has delivered great outcomes to thousands of timeshare owners. To learn how Lemonjuice can create great options and outcomes for you, contact Scott MacGregor (Scott.MacGregor@Lemonjuice.biz) at (321) 236-6663, or visit www.lemonjuicesolutions.com.