There are generally two types of timeshares that can be purchased by a taxpayer:
- The first variation was widely promoted in the 1970s and 1980s and generally consists of a right to use a type of unit at a particular location for a specified period of time. These are generally considered personal property and are not eligible for §1031 tax deferral.
- The other variation has become more popular in the past 10-15 years and generally consists of a taxpayer purchasing the legal title, not merely rights to use a property, to a specific unit for a specified period of time. This second variation is generally considered real property and may qualify for §1031 tax deferral.
Even if the timeshare owner has title to a real property interest, they should be able to support that the primary intent for holding the timeshare is for investment purposes. In Dewey vs. Commissioner, the IRS did not allow §1031 tax deferral because they determined the taxpayer’s primary purpose for a two-week timeshare purchase was personal enjoyment and not for investment purposes.
As with any §1031 exchange, the taxpayer should be able to substantiate that the primary intent for holding the property was either for investment or business purposes.
How to 1031 Exchange and Still Get the Timeshare
There’s a simple tactic we often suggest to those that are seeking options that do not qualify for a 1031 exchange such as a timeshare, cabin or vacation home, RV, or even a boat or car payoff. In cases like this, we suggest that the exchangor utilize all sale proceeds (as opposed to forgoing the exchange and using after-tax money) to invest in a property that generates a passive monthly income. Using this method, the investor can earn a monthly income which can, in turn, be used for monthly payments on the cabin or car payment. The primary benefits of this method are the preservation of capital as well as increased after-tax income due to depreciation.