Taxable investment income turned into nontaxable expense reduction

[Toddtheformeraccountant]

This just hit me this morning. I hate timeshares, they are horrible, stupid, and make little economic sense. However....the tax aspects are intriguing and potentially outweigh some of the many negatives, particularly for high tax rate people such as myself. Simple example.....spend $50,000 for a timeshare which, by utilizing the timeshare for vacation travel that you would otherwise pay, say, $2,000 for each year (let's say, including the impact of annual fees you have to pay). That's a yield of 4%. Not really that exciting, basically something like a long bond yields but with higher risk. However, when you consider the tax aspects...the $2,000 saved is "earnings" that aren't taxed...it's really like earning 7.3% if you are, say, in a 45% marginal tax bracket. I understand that it would have to provide vacation value you would otherwise pay for...and you'd have to consider all the costs such as annual fees...and that with a timeshare you are limited to certain areas/timeframes making it not necessarily equivalent to just being able to pay for a vacation when and where you exactly want (which is why I've never bought a timeshare)...but the tax avoidance opportunity is interesting. Anyone else have further thoughts on this? What other opportunities should we be looking at that provide "income" as a form of expense reductions that are not taxable? ((using cash to buy the house you live in rather than investing otherwise and paying rent is an obvious example).).

 

[Sunset]

This idea basically applies to many things that you buy vs rent, especially if the thing does not depreciate quickly.

Example: buy a canoe/kayak for $600 instead of renting one for $100/wk, your canoe/kayak will last 20-40 years paying for itself many times over.

However, your timeshare example is bad, due to the yearly maintenance fee required, and a $50K timeshare would (I estimate) have a $1,500 yearly maintenance fee for your 1 week per year.

 

[pb4uski]

Yup.... I haven't bought one but the impression that I have is that what you have to pay annually for fees would be a healthy percentage of what you would pay for a similar room/condo. Also, a 45% marginal tax rate is a bit ridiculous.... most people would be 24% or lower for federal... add another 6-9% for state and you're at 30-34%... a far cry from 45%.

Or let's put is another way, if someone's income in retirement is high enough that their marginal tax rate is 45%, then they don't need to be trying to squeeze a few more nickels out in a timeshare play.