LB&I Directive on Timeshare Issue


Date: August 27, 2018


Control Number: LB&I-04-0818-013

       Affected IRM:  IRM 4.51.2                     


Douglas W. O’Donnell /s/ Douglas W. O’Donnell
Commissioner, Large Business and International Division

LB&I Directive on Timeshare Issue        

This Directive provides instructions to Large Business & International (LB&I) examiners in the selection of timeshare industry issues for examination.


LB&I manages U.S. withholding tax issues under examination and related resources in the most efficient and effective manner possible. This Directive provides instructions with respect to managing issues under section 1445 related to certain timeshare arrangements. Specifically, this Directive applies to examinations of LB&I taxpayers (that is, taxpayers with assets equal to or greater than $10,000,000) that failed to file Forms 8288, 8288-A or 8288-B for personal use timeshare “upgrade” transactions, described in the Background section below, that result in no realized gain to nonresident alien individuals (“NRAs”). Transactions involving timeshares that are not described below, such as transfers where an NRA realizes gain, are not within the scope of this Directive.1   

This Directive is effective for all taxable years ending on or before December 31, 2017, and for subsequent taxable years until further notice.


This Directive involves withholding agents engaged in the timeshare business in the United States (“Taxpayers”).  Pursuant to this business, Taxpayers sell certain interests in vacation resort real property located in the United States (“timeshare interests”) to U.S. tax residents and NRAs for their personal use. The timeshare interests constitute United States real property interests within the meaning of section 897(c).

Under the timeshare agreement with the Taxpayer, a timeshare owner may exchange his or her personal use timeshare interest for a different personal use timeshare interest (“upgrade transaction”). In an upgrade transaction, the timeshare owner disposes of one timeshare interest to the Taxpayer at a loss (or no gain), and acquires another timeshare interest from the Taxpayer with a greater value. For example, a timeshare owner that holds a timeshare interest (“Unit 1”) may exchange his or her timeshare interest for another timeshare interest with a better view (“Unit 2”).  In such a transaction, Taxpayer requires the timeshare owner to provide additional consideration (typically cash) to the Taxpayer equal to the difference between the purchase price of Unit 2 and the original purchase price of Unit 1.  However, if the fair market value of Unit 1 at the time of the upgrade transaction is lower than its original purchase price, then the timeshare owner must provide additional consideration to the Taxpayer equal to the difference between the fair market value of Unit 1 and the purchase price of Unit 2.

For purposes of sections 897 and 1445, an upgrade transaction consists of two transfers.2 The first transfer is a disposition of a timeshare interest by the owner to the Taxpayer. The second transfer is an acquisition of a new timeshare interest by the same person from the Taxpayer. If the owner is an NRA, the first transfer is a disposition of a U.S. real property interest under section 897(a) by a foreign person. As a result, the Taxpayer, as the purchaser (or transferee), would be required to withhold under section 1445 on the amount realized.

In the upgrade transaction, the upgrading NRA timeshare owner does not realize any gain on the first transfer. A timeshare owner that is upgrading to a higher value timeshare interest is assigned value for the first timeshare interest that does not exceed its original purchase price. Except in cases where the timeshare owner purchases the timeshare interest for investment, the NRA timeshare owner’s basis in the transferred timeshare interest is generally equal to its original purchase price. Accordingly, the amount realized by the NRA timeshare owner will ordinarily not be higher than the NRA’s basis in such interest. Thus, no gain is realized by the NRA timeshare owner on the first transfer. 3

This Directive only applies to an upgrade transaction if the NRA originally purchased the timeshare interest being disposed of from the Taxpayer.

Planning and Examination Guidance Related to Scope

If an examiner determines it is necessary to verify whether a transfer is within the scope of this Directive, the examiner should request that the Taxpayer provide the following information regarding the transfer:

  1. Name and home address of timeshare owner;
  2. Unit number/address of the disposed timeshare interest;
  3. Date of the purchase of the disposed timeshare interest;
  4. Purchase price of disposed timeshare interest;
  5. Date of the upgrade transaction;
  6. Fair market value of the disposed timeshare interest;
  7. Value of the disposed timeshare interest credited to the NRA;
  8. Purchase price of the newly purchased timeshare interest; and
  9. Unit number/address of the newly purchased timeshare interest, as well as the description (and amount) of any other consideration (for example, credits or points) exchanged in the upgrade transaction.


To efficiently and effectively use resources, examiners should not examine the failure to file Forms 8288, 8288-A, and/or 8288-B with respect to upgrade transactions involving NRAs described in the Background section of this Directive because the upgrade transactions are not expected to result in realized gain to the NRA. Examiners should treat such taxpayers as having filed Forms 8288, 8288-A, and/or 8288-B and having fulfilled their withholding obligations under section 1445 and the regulations thereunder. 

Contact Information and Limitations on Use

If you have any questions, please contact the Withholding Practice Network for assistance.

This Directive is not an official pronouncement of the law or the position of the Service and cannot be used, cited or relied upon as such. In addition, nothing in this Directive should be construed as affecting the operation of any other provision of the Code, regulations or guidance thereunder. These instructions are intended for internal decision making only.

cc:  Division Counsel, LB&I

1 In general, there will not be realized gain in a fee simple personal use ownership situation because the owner’s adjusted basis would not reflect a depreciation allowance.  However, there may be realized gain in a fee simple ownership of property held in a trade or business, or property held for the production of income (generally, rental property) because the owner’s adjusted basis may reflect a depreciation allowance.  However, section 1031 may defer recognition of that gain.  See footnote 2. 

2 In the case of property held for investment, section 1031 of the Code may apply to defer realized gain or loss.  In general, for exchanges completed after December 31, 2017, section 1031 applies only to exchanges of real property for real property. Section 13303 of P.L. 115-97.  We do not express an opinion concerning whether a fee interest in a timeshare held for investment is real property under section 1031 as amended by P.L. 115-97. 

3 See footnote 1.