Timeshare

A timeshare is an interest that entitles its holder to use accommodation for a specified part of each year over a long period. Federal law supplies a definition, and it is the one federal mortgage regulation borrows. Under 11 USC 101(53D), a timeshare plan is an interest purchased in an arrangement "whereby a purchaser, in exchange for consideration, receives a right to use accommodations, facilities, or recreational sites, whether improved or unimproved, for a specific period of time less than a full year during any given year, but not necessarily for consecutive years, and which extends for a period of more than three years."

Two structures sit inside that definition. A deeded timeshare conveys an interest in real property, recorded and inheritable, often as an undivided fractional interest in a unit tied to a particular week. A right-to-use timeshare conveys no property interest at all: it is a contractual right to occupy for a stated number of years, after which it ends. Points-based and club memberships are usually variations on the second. The distinction matters for what can be sold, willed or foreclosed, and it is frequently not obvious from the sales material, so it is worth establishing before anything else.

The purchase price is the smaller commitment. Every timeshare carries an annual assessment, usually called a maintenance fee, which funds the resort's operating costs, insurance, taxes and reserves. It is due whether or not the owner uses the week, it generally rises over time, and it continues for as long as the interest is held. Where the resort faces a cost larger than its reserves, the shortfall is billed as a special assessment, in the same way it is in any common-interest community. Because the price is paid once while the assessment recurs and rises, the assessments can come to exceed the purchase price over a long holding period, which is why any comparison that looks only at the price is measuring the wrong thing.

The body that levies them is recognized in the tax code. IRC 528 defines a "timeshare association" alongside condominium and residential real estate management associations, as an organization whose members hold timeshare rights to use, or timeshare ownership interests in, association property. The elective regime that provision creates, and the rate that goes with it, belong with homeowners associations generally.

One federal consumer-protection rule expressly does not reach timeshare financing, and it is the one most people would assume applies. Regulation Z's ability-to-repay requirement, at 12 CFR 1026.43, obliges a creditor to make a reasonable and good-faith determination that a borrower can repay before making most closed-end mortgage loans. Its scope provision excludes "a mortgage transaction secured by a consumer's interest in a timeshare plan, as defined in 11 U.S.C. 101(53(D))." So a loan taken at a sales presentation to buy a timeshare sits outside that determination by rule, not by oversight. That is a fact about how the product is financed, and it belongs in any assessment of it alongside the price and the fee.

The tax code treats a timeshare more generously than most people expect, in one direction only. Publication 936 states that "you can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements," describing a time-sharing plan as an arrangement between two or more people that limits each person's interest in the home, or right to use it, to a certain part of the year. So interest on debt secured by a qualifying timeshare can be qualified residence interest, subject to the same limits that apply to any second home. The publication adds a condition for owners who rent out their week: "If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year," and days of use and rental are counted only during the period the owner has a right to use the property or to receive benefits from renting it. Whether a timeshare is a "second home" in any other rulebook, particularly a mortgage lender's, is a separate question with a different answer.

Developer financing is structurally normal here for a reason written into the tax code. The installment method is generally unavailable on a dealer disposition, which would otherwise force a seller of inventory to report the whole gain in the year of sale. IRC 453(l)(2)(B) carves out dispositions in the ordinary course of business, to an individual, of a timeshare right to use or ownership interest in residential real property for not more than six weeks a year, provided the seller elects to pay interest on the deferred tax under the accompanying provision. In plain terms, Congress preserved installment reporting for timeshare sellers on stated conditions, which is part of why in-house financing at the point of sale is the industry norm rather than the exception.

What a timeshare is not is an income-producing asset. Nothing in the structure generates a return to the owner. It converts money into future occupancy, and the only ways to realize value from it are to use it, to exchange it, or to rent it out, the last of which carries the tax condition above. Reselling requires finding a buyer for an interest that carries a perpetual bill with it, and an owner who cannot use the week still owes the assessment. That asymmetry, obligations that continue and rights that expire annually if unused, is the defining feature of the product and is the thing to weigh before buying. A separate industry has grown up around owners who want out, and it has its own hazards.

A buyer purchases an interest, either deeded or right-to-use, usually tied to a specific week, a floating week, or a number of points redeemable within a system. The buyer pays the price, often financed at the point of sale, and then pays an annual assessment set by the association or operator. Use is reserved through the operator's booking system, and many owners exchange their week through an exchange company for a fee.

A hypothetical cost example. The Ochoas pay $18,000 for one week a year and the annual maintenance fee starts at $1,300. If the fee never rose, ten years of ownership would cost $31,000 in total ($18,000 plus ten fees of $1,300), which is $3,100 for each week actually used.

Fees do rise. Assume a hypothetical 5 percent a year. The tenth year's fee is then about $2,017, and the ten years of fees total roughly $16,350 rather than $13,000. The ten-year cost becomes about $34,350, or roughly $3,435 a week. Two things follow from that arithmetic. The assessments have cost nearly as much as the purchase price by year ten and will keep running after it. And each week the family cannot use raises the cost of the weeks they do, because the fee is owed either way.

Pros

• It fixes access to accommodation in a chosen place at a chosen time of year, which has real value to a household that reliably takes the same vacation.
• The accommodation is generally larger and better equipped than a hotel room at a comparable nightly price.
• A deeded interest is real property, so it can be sold, gifted or inherited in the ordinary way.
• Interest on debt secured by a qualifying timeshare can be qualified residence interest for the mortgage interest deduction if the requirements are met.

Cons

• The annual assessment continues for as long as the interest is held, rises over time, and is owed whether or not the week is used.
• Special assessments for major repairs work as they do in any common-interest community, with the cost of the work rather than a stated ceiling as the limit.
• The federal ability-to-repay requirement that governs most mortgage lending does not apply to a loan secured by a timeshare interest.
• The interest produces no income to the owner and no return; it prepays consumption.
• Getting out requires a willing transferee for an interest that carries a recurring bill, and the industry that has grown up around owners trying to exit carries its own risks.