In a 1031 exchange, a tax-deferred exchange is done by selling an investment property and replacing it with another like-kind property. A timeshare is considered a personal-use property, which does not qualify for a tax-deferred exchange.
However, there are some circumstances where a fractional ownership property, which is similar to a timeshare in some ways, can be used in a tax-deferred exchange.
It is important to understand the difference between a fractional ownership property and a timeshare. In fractional ownership, a group of people purchase a piece of real estate and have ownership interest in the property by holding title. In a timeshare, the buyer purchases the right to use the property for a certain amount of time each year.
In fractional ownership, there are very few times it will qualify in a 1031 exchange, but it might be possible in very specific circumstances.
To qualify a property for a 1031 exchange the taxpayer, or exchanger, must show that they primarily use the property as an investment, not for personal use or enjoyment.
When planning a 1031 exchange, it is important to meet with a legal or financial advisor to ensure that the qualifications are being met, especially in complex cases like timeshares and fractional ownership properties.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits.