Can You 1031 Exchange a Timeshare?

Usually not, but it is not impossible. A timeshare can be exchanged under Section 1031 only if two things are true: the interest is real property, which in practice means a deeded ownership interest rather than a membership or points contract, and you hold it for investment or for use in a business rather than for your own vacations. Most timeshares fail the second test because they are bought for personal use. Many also sell for less than their owners paid, which leaves no gain to defer in the first place.

What has to be true for any property to qualify?

Section 1031 applies to real property held for productive use in a trade or business or for investment, exchanged for other real property held the same way. Since 2018 only real property qualifies. Personal property, such as furniture, vehicles or contract rights, is outside the rule.

That gives a timeshare owner two separate questions to answer:

• ›Is what you own real property? That depends on how the interest is structured and how state law treats it.
• ›Do you hold it for investment? That depends on how you actually use it, not on what the sales brochure said.

Both answers have to be yes. A deeded week that you use every summer for your family holiday fails the second question even though it passes the first.

Is a timeshare real property?

It depends on what you bought. Timeshares are sold in a few common forms, and they are treated very differently.

• ›Deeded or fee simple timeshare. You receive a recorded deed to an undivided fractional interest in a unit, often tied to a specific week. This is generally an interest in real property under state law, so it can pass the first test.
• ›Right to use timeshare. You hold a contract or lease that lets you use a unit for a set period, often a fixed number of years, with no ownership of the real estate itself. Whether this counts as real property is much less certain and turns on its terms and state law. Some long term leasehold interests can qualify, but a short contractual right generally will not.
• ›Points or vacation club membership. You hold points that you spend on stays across a network of resorts. This usually looks like a contract right, not an ownership interest in a particular piece of land, and is unlikely to be treated as real property.

If you are not sure which one you own, the purchase contract and any recorded deed will show it. A title company can confirm whether a deed was recorded in your name.

When would a timeshare count as held for investment?

The held for investment test looks at your intent, judged by the facts. The IRS has offered a safe harbor for vacation homes and dwelling units in Revenue Procedure 2008-16, and owners often look to it as a guide. In broad terms it describes a property that, for each of the two years around the exchange, is rented to others at fair rent for at least 14 days, with your own personal use kept to no more than the greater of 14 days or 10 percent of the days it was rented.

Most timeshare owners cannot meet anything like that. A typical deeded week gives you seven days a year. If you use those seven days yourself, the property is personal use property. If you rent the week to someone else through the resort or a rental platform every year and never stay there, the picture changes, although the safe harbor is not a perfect fit for a one week interest and the facts need careful review with your CPA.

Facts that tend to support investment intent include:

• ›A rental history with unrelated guests at market rates.
• ›Rental income reported on your tax return.
• ›No personal or family use of the week.
• ›Records of the costs of owning and renting it, such as maintenance fees and rental commissions.

Is there any gain to defer?

This is the question that ends most timeshare exchange plans before they start. A 1031 exchange defers tax on a gain. Many timeshares resell for well below their original purchase price, sometimes for a small fraction of it, because the original price included heavy marketing costs and the resale market is thin.

As an illustrative example only: an owner who paid $28,000 for a deeded week and sells it for $6,000 has a loss, not a gain. There is nothing for Section 1031 to defer. Worse, the exchange would carry that loss into the replacement property rather than letting it be recognized.

For a timeshare held purely for personal use, a loss on sale is generally not deductible, because losses on personal use property are not deductible. For a timeshare genuinely held as a rental, a loss may be treated differently. That is a conversation for your CPA, and it is often more valuable than any exchange discussion.

What if you do have a deeded, rented timeshare with a gain?

It can happen, particularly with fractional interests in high demand resort areas, or interests bought on the resale market at a low price that have since appreciated. If the interest is deeded real property, held for investment and sold at a gain, the normal exchange rules apply:

• ›A Qualified Intermediary has to be engaged before the sale closes, and the proceeds have to go to the intermediary, not to you.
• ›Replacement property must be identified in writing within 45 days of the sale.
• ›The purchase must close within 180 days, or by the due date of your return including extensions if that is earlier.
• ›Replacement property must also be real property held for investment or business use. It does not have to be another timeshare.

On a small sale, intermediary fees, closing costs and transfer taxes can take up a meaningful share of the gain, so ask your CPA whether the deferral is worth the cost.

What about exchange companies that swap timeshare weeks?

Resort networks that let you trade your week for a stay elsewhere are a travel arrangement, not a Section 1031 exchange. They have nothing to do with deferring gain.

What should you check before you sell?

If you own a timeshare and are wondering whether an exchange applies, gather a few documents first:

• ›The deed or purchase contract, to confirm whether you own real property or a right to use.
• ›Your original cost, including any closing costs, and the expected sale price.
• ›Rental and personal use records for the last two years.
• ›Tax returns showing whether rental income and expenses were reported.

Your CPA and a Qualified Intermediary can then tell you whether there is anything worth deferring.

For most owners a 1031 exchange is not the right tool for a timeshare, because it is personal use property or is selling at a loss. The exception is a deeded interest genuinely run as a rental that has gained value. If that is yours, review it with your own advisers before you list it.