Delinquent Maint Fees Taxable By IRS?

[Resort Guy]

I manage a small HOA run resort that is dealing with the PCC's, Viking Ships and delinquent owner issues like most all resorts. We allow free deed back of any weeks from any owner who longer want their weeks.... no questions asked. Even with this liberal policy we still have many owners who simply refuse to return calls, sign a deed transfer to give their week(s) back to the HOA, or cooperate with us at all as their delinquent fees accumulate year after year. In the meantime, we cannot get free title to resell these units and the foreclosure process is prohibitively expensive.

We have a duty to our paying owners to keep maintenance fees low and to protect the HOA from excessive delinquencies. Part of this is to bring in delinquent weeks and attempt to resell or rent them out.

As a means of encouraging these delinquent owners to simply sign a deed transfer and walk away from their bad debt, we are considering writing off this bad debt and sending the delinquent owner a 10-99 tax statement that they are liable for paying similar to income. It is our attorney's stance that this is similar to what a mortgage company does when eliminating debt via a short sale. In the eyes of the IRS, a forgiven debt is considered income.

Maybe the idea of having to pay taxes on unpaid maintenance fees would provide an incentive to simply give the weeks back to the HOA.

Do any other resorts do this already? I would appreciate any thoughts or feedback. Thanks

 

[timeos2]

I like the approach. I don't know if any resorts have tried it but if your legal advisers say it passes muster I'd sure give it a shot. One or two $700+ "incomes" on a 1099 may get the owners attention.

Just to be sure you know there is no requirement that the Association foreclose on delinquent weeks in order to rent them out. There may be notice of intent required but once that is given (we mail ours with the bills) as soon as it is 1 day delinquent you can rent the use and the owner, even if they later pay, has no guarantee they will get the use for that year / use period.

It is important that resorts be firm but fair in applying penalties. If one owner gets locked out & their time put up for rent on January 2 then ALL delinquents should get exactly the same treatment.

Good luck and please let us know if the idea is tried and what the results are.

 

[ace2000]

It is our attorney's stance that this is similar to what a mortgage company does when eliminating debt via a short sale. In the eyes of the IRS, a forgiven debt is considered income.

In actuality your example would be similar to forgiving the original note on the timeshare, not the maintenance fees.

Let's say that at some point in the future, it is determined that these fees are not "forgiven debt". Is it possible you could be sued by owners that have already paid the IRS?

 

[timeos2]

In actuality your example would be similar to forgiving the original note on the timeshare, not the maintenance fees.

Let's say that at some point in the future, it is determined that these fees are not "forgiven debt". Is it possible you could be sued by owners that have already paid the IRS?

They would be unable to bill them in the future for those past fees once they were reported. The NEW fees for the next year would be billable & thus reportable if the resort also wrote those off and stopped demanding them from the owner. It would be a way to get the deed signed over more than a method to collect past fees at that point.

 

[ace2000]

They would be unable to bill them in the future for those past fees once they were reported. The NEW fees for the next year would be billable & thus reportable if the resort also wrote those off and stopped demanding them from the owner. It would be a way to get the deed signed over more than a method to collect past fees at that point.

I guess my question is... do maintenance fees constitute a debt (in the same manner as a mortgage debt?) If it does, then any non-payment that is written off could be classified the same way... doctor bills, utility bills, etc.

I could see where it could be argued that it is similar to written off credit card debt though. That's taxable.

 

[Saintsfanfl]

To reiterate, all charged off debt is taxable, so your scenario is correct.

The big hole, as timeos briefy mentions, is you are giving up any right to collect that debt. If you write it off and send them a 1099C you no longer own the debt and cannot enforce any type of collection methods. Technically a forgiven owner could jump back in, pay the next maintenance fee, and start using the timeshare. You cannot force them to pay the past due fees.

 

[Saintsfanfl]

I guess my question is... do maintenance fees constitute a debt (in the same manner as a mortgage debt?) If it does, then any non-payment that is written off could be classified the same way... doctor bills, utility bills, etc.

I could see where it could be argued that it is similar to written off credit card debt though. That's taxable.

It's all the same. Doctor's bills, utility bills, and credit card debt. If any of it is charged off it is taxable. You only issue and receive a 1099C if it is $600 or more but it is taxable even if it is only $1.

 

[ace2000]

It's all the same. Doctor's bills, utility bills, and credit card debt. If any of it is charged off it is taxable. You only issue and receive a 1099C if it is $600 or more but it is taxable even if it is only $1.

Interesting, thank you!

 

[Saintsfanfl]

This brings up an intersting issue. Credit card debt is almost never considered a "forgiven" loan unless you negotiate and pay a smaller amount. The reason is because they sell it and sometimes it is resold several times. The last one to hold it is usually a very bottom of the barrel collection agency that sees no monetary benefit in "forgiving" the loan just to waste time issuing a 1099C. You can owe something forever and have it not be taxable but if you negotiate down you get a tax bill.

 

[Saintsfanfl]

I have seen some creditors list a "charge-off" on a credit report but then still sell the debt. When I used the term "charge-off" I am referring to a write-off and debt forgiveness. They cannot both sell the debt and forgive the debt. The term "charge-off" is confusing because it is used on the form 1099C. Form 1099C specifically refers to the debt no longer existing in any capacity, otherwise it could not be considered income.

 

[Saintsfanfl]

It's all the same. Doctor's bills, utility bills, and credit card debt. If any of it is charged off it is taxable. You only issue and receive a 1099C if it is $600 or more but it is taxable even if it is only $1.

Charged off but not transfered or sold.

Now that I have beaten that horse...

 

[Talent312]

If a MF debt is cancelled or forgiven, an owner could demand that a lock-out be lifted and their account placed in good standing, as if the MF was paid. To avoid that, it may be better to wait until two MF's were missed, and forgive only one, so the other can still be enforced and used to lock out the owner. It would also be appropriate for the Board to establish this as an HOA policy, perhaps enshrining it in the bylaws, to avoid arbitrary or selective application.
.

 

[Saintsfanfl]

Talent312 lays out a good plan but I am still doubtful as to the overall effectiveness of the idea. How many people past due on maintenance fees are also past due on other debt? If these people also have past due taxes to the IRS then a 1099C for the maintenance fee might be a drop in the bucket. These are people ignoring the opportunity to do a simple deed back and be out of the recurring fees. These are not people with the act together. These sound like the type of people that might not care about a 1099C.

 

[vacationhopeful]

They might not pay attention to a 1099 ... but the IRS certainly does. And not too many people like the IRS seizing a tax refund in current year for underpaid taxes (with penalty & interest) from 3 and 4 and 5 years ago.

 

[Resort Guy]

This is why I love Tug so much!! All very good points. Thanks for the input.

 

[timeos2]

See what a little collective thinking can come up with? This is exactly why HOA's need to be creative and proactive rather then merely saying "bad debt - raise the fees". If resorts are consistent, apply the same standards to every owner and let owners know they are serious about collections the results are usually very good. For those that still refuse to pay this type of thinking can help get the problem corrected in a relatively short time period.

This is just one avenue to take. If a few others, the ones that best apply in a given situation, are also used then many of the resorts would find the "problem" weeks and their owners fix themselves.

 

[theo]

I believe this is already being done...

I manage a small HOA run resort that is dealing with the PCC's, Viking Ships and delinquent owner issues like most all resorts. We allow free deed back of any weeks from any owner who no longer want their weeks.... no questions asked. Even with this liberal policy we still have many owners who simply refuse to return calls, sign a deed transfer to give their week(s) back to the HOA, or cooperate with us at all as their delinquent fees accumulate year after year. In the meantime, we cannot get free title to resell these units and the foreclosure process is prohibitively expensive.

We have a duty to our paying owners to keep maintenance fees low and to protect the HOA from excessive delinquencies. Part of this is to bring in delinquent weeks and attempt to resell or rent them out.

As a means of encouraging these delinquent owners to simply sign a deed transfer and walk away from their bad debt, we are considering writing off this bad debt and sending the delinquent owner a 10-99 tax statement that they are liable for paying similar to income. It is our attorney's stance that this is similar to what a mortgage company does when eliminating debt via a short sale. In the eyes of the IRS, a forgiven debt is considered income.

Maybe the idea of having to pay taxes on unpaid maintenance fees would provide an incentive to simply give the weeks back to the HOA.

Do any other resorts do this already? I would appreciate any thoughts or feedback. Thanks

I know of one particular New England facility that I believe does exactly this already; at least the manager had so indicated when I met with him privately a year or so ago while staying at his facility for a few days. In the interests of respecting the privacy of that conversation, and since I do not own at that particular resort myself, I think it prudent to keep the name of that manager and that facility in confidence.
My point is simply that I believe this is already being done.

 

[ronparise]

I think what you want is control of the week to either resell or rent. The important thing is to collect some money on the stuff.

It seems to me sending forgiving the debt and issuing a 1099 just delays the inevitable. You still want control of this stuff, and you are adding an additional step. And you are making money for Uncle Sam, and not the HOA. Of course if it does encourage the delinquent owners to at least contact you, that would be a good thing...I dont think Id do this with every delinquent owner, but it might be worth a test

As timos2 points out you can already rent it.

I own at a resort that offers owners that pay their fees the use of another week, for another mf payment...I have no doubt that these "bonus" weeks are weeks where the owner hasn't paid.

For weeks that seem to be abandoned, you could rather than re selling them (you cant do that because you cant get title) lease them on a long term basis, ie 5 years of vacations for $2500

 

[buzglyd]

I can't say I've heard of such a thing.

So many problems related to collecting the debt are related to FINDING the owner.

So many of our clients don't have SS#. How could you report it to the IRS without that.

 

[timeos2]

I can't say I've heard of such a thing.

So many problems related to collecting the debt are related to FINDING the owner.

So many of our clients don't have SS#. How could you report it to the IRS without that.

If it isn't on record that's some of what a good collection agency can do - find what they term "skips". For many years now our resorts have required a SS number at transfer so, guess what, once again making the PCC's / Viking Ships get over one more hurdle. Of course if they fake it ... (and the world still turns).

There is also notifying the owner they "Have a rental money coming" and requesting the SS number for the income. Most are greedy enough to send it in - pronto. Then it does generate a 1099, so there are ways. After all the income was rent - but the resort gets that, the owner gets the 1099. Play all the angles that you can.