I am not sure I follow the shorting problem. You have an SPST switch with an LED connected to one side; the LED having a resistor inside the switch sized for 12VDC. The other side of the LED is brought out to a separate terminal.
First ignore the LED and decide if the switch is OK. A low voltage switch won't care much between 12 volts and 18 volts. As mentioned contact arcing is less of a problem for AC because the voltage goes to zero every 8 millisecond which would extinguish any arc. Since the switch is rated for DC this should not be a problem anyway. Finally the current rating must handle the load. Essentially these are the same questions you would ask about the relay contacts if you used relays.
If you are using the switch to bridge the insulated rail into the siding this is no different than running a train into an unpowered siding. The trouble here is the current is flowing through the internal wires between the two rollers. Again, this issue is no different if you using relays. (If you are using an independently controlled supply to the siding you need to worry about phasing and you will have a problem if the siding voltage does not match the main line when you enter the siding.)
Now consider the LED. You need to consider the current and polarity. If this were an incandescent lamp the polarity would not matter but the current would be 50% higher at 18VAC vs. 12VDC and could be a problem. An LED will act as a half wave rectifier so the current won't be much different with 18VAC vs 12VDC. However the reverse voltage of the LED is an issue. That is why the series diode is suggested. The Anode of the external diode should be toward the switch and the Cathode (stripe) should be toward the supply return. You could use a diode per switch or a common diode - with the latter the diode must be able to handle the current when all LEDs are on.
Note, if the switch is OFF and you run an engine into the siding the LED will illuminate.
