Is DVC real estate?

[dsanner106]

Though I believe the answer is no, I have a friend selling a vacation property and looking for another vacation property to put the funds into. As DVC has an expiration date, I assume it is not actual real estate but want to ask.
Drew

 

[CarolMN]

It has some features in common with real state, but technically, DVC is a deeded interest in a lease.

 

[Dean]

Though I believe the answer is no, I have a friend selling a vacation property and looking for another vacation property to put the funds into. As DVC has an expiration date, I assume it is not actual real estate but want to ask.
Drew

Technically it is but if he's looking at doing a 1031 exchange it likely wouldn't be eligible from what I'm told. Technically it's likely possible but meeting all the requirements would be difficult to impossible. Also it's like waiving a big red flag that says "Audit Me".
http://www.orexco1031.com/downloads/ereport_vacationhomes.pdf
http://apiexchange.com/index_main.php?id=8&idz=62
http://www.tugbbs.com/forums/showthread.php?t=45348

 

[drusba]

It is legally a real estate interest. It is similar to the real estate interest one would have in a condominium in that you have an ownership interest in a particular unit at the resort and also an interest in the common areas. That the land itself is owned by Disney and leased to the particular DVC owners' association for a resort and that there is an end date to your ownership does not take it out of the usual legal meaning for a real estate interest. Like other real estate interests, transfer is by deed which is recorded with the local government agency that records real estate records. Your purchase from Disney can be subject to a mortgage and the holder of the mortgage would need to follow forclosure proceedings generally applicable to owners of real estate if you fail to pay the mortgage. You pay property taxes applicable to real estate. You can usually deduct the mortgage interest and property taxes the same as you would for other real estate that is used as a vacation home.

As Dean notes, you likely cannot do a like kind transfer under Section 1031 of the IRS code to avoid capital gains taxes when selling but that is not because the timeshare has an end date but instead because you likely won't be able to establish that the DVC timeshare is held for investment purposes as required for a 1031 transaction. Also note that if your friend held that other property for the purpose of renting it out all the time and that is also what he is looking for in DVC then he will also have a problem. Your DVC real interest is subject to an anti-commercial purpose clause in that owners agree that the property is being purchased for their own personal vacation use and not for a commercial purpose. You can occassionally rent your interest but if the only thing you do is rent your interest and never use it yourself, you could potentially face a claim of violation of the rules.

 

[dsanner106]

Thanks, this does clarify, to an extent the information I had gotten to this point. He was told he needed to rent another home a couple weeks a year, approximately to meet that portion of the law, as that was frequency of rental of the home. I suppose taken as a percentage, it would be roughly 4 percent of his points, which would not be bad. Calls for further research, if there is a way it works, I know he wants to make it happen.
Thanks again.
Drew

 

[Dean]

Thanks, this does clarify, to an extent the information I had gotten to this point. He was told he needed to rent another home a couple weeks a year, approximately to meet that portion of the law, as that was frequency of rental of the home. I suppose taken as a percentage, it would be roughly 4 percent of his points, which would not be bad. Calls for further research, if there is a way it works, I know he wants to make it happen.
Thanks again.
Drew

I'm not sure you could get 2 top experts in this area to completely agree in the 1031 arena but my understanding is that any property in question must be held primarily for investment purposes and that simply renting out a vacation home 2 weeks a year did not qualify under the 1031 guidelines. My sense is that the only way to make this work with a timeshare would be to buy to rent exclusively. I'm 100% certain that owning a vacation home and renting it twice a year and buying DVC and trying to rent a proportional amount is not going to qualify under any reasonable interpretation partly because of the limited personal use requirements.