Depreciation and DVC: Does It Affect Your FIRPTA Refund?
Some DVC owners rent out their points each year for rental income. If you have been renting your DVC and reporting that rental income on a US tax return, depreciation may have reduced your cost basis — and that can affect your FIRPTA tax calculation when you sell.
How Depreciation Works for Rental Property
When you rent out US real property and report the income on a US tax return, you are generally entitled to deduct depreciation on the property. Depreciation is a non-cash deduction that reduces your taxable rental income. However, it also reduces your tax cost basis in the property by the amount of depreciation you claimed (or were entitled to claim).
For a DVC contract used only for personal vacations with no rental activity, depreciation is not relevant. Your cost basis remains the purchase price plus qualifying closing costs.
Depreciation Recapture
If you did claim depreciation on your DVC rental activity, when you sell the contract you may owe depreciation recapture tax (Section 1250 recapture) at a rate of up to 25% on the depreciated amount. This is separate from the capital gains rate on your appreciation, and it can increase your actual tax beyond what a simple 15% of gain calculation would show.
How It Affects Your FIRPTA Withholding
The 15% FIRPTA withholding at closing is calculated on the gross sale price regardless of depreciation recapture. But when you file your 1040-NR and calculate your actual tax, any depreciation recapture increases your tax liability. In some cases, this brings the actual tax closer to or even exceeding the withholding amount.
Get Professional Help If You Rented Your DVC
If you have been renting your DVC points and filing US returns reporting that rental income, your tax situation on sale is more complex than a straightforward capital gain calculation. A tax professional experienced in FIRPTA and non-resident rental property is essential to make sure your 1040-NR correctly calculates the depreciation recapture, the capital gain, and the resulting refund.
