Do Timeshares Qualify for 1031 Exchanges?

Do Timeshares Qualify For 1031 Exchanges?

A taxpayer may purchase one of two types of timeshare:

  1. It generally involved a right to use a type of unit for a specified period at a particular location in the 1970s and 1980s. A 1031 tax deferral cannot be applied to these because they are generally considered personal property.
  2. In the past 10-15 years, the other variation has become more prevalent in which a taxpayer purchases the legal title, not only the rights to use, to a specific unit. The second variation may qualify for a 1031 tax deferral because it is generally considered real property.

Timeshare owners must demonstrate that they are primarily holding the timeshare as an investment. The IRS denied the taxpayer’s application for a 1031 tax deferral in Dewey vs. Commissioner because the taxpayer’s primary purpose for purchasing a 2-week timeshare was not an investment.

It is an essential element of any 1031 exchange that the taxpayer can substantiate that the primary intent of holding the property was either investment or business.

How can I do a 1031 exchange while still getting the timeshare?

We often suggest a simple tactic if you’re seeking non-1031 options, such as a timeshare, cabin, RV, boat, or car payoff. Rather than avoiding the exchange and using after-tax money, investing in a property with a passive income is recommended. Investors can use this method to earn a monthly payment towards a cabin or car, and depreciation preserves capital and increases after-tax income.

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