June 26th, 2007
Fractional Ownership. Is This A Lasting Trend?
The hot new topic in our industry in Hawaii right now is “Shared Ownership” properties or “Fractional Ownership” properties. There have been a growing number of properties coming on the market that offer Fractional Ownership . I get calls weekly about some of the properties because they are listed as single family homes, but for a fraction of the cost of what comparable homes are selling for.
What is Fractional Ownership? This is were you own a percentage interest in a property (home), lets say 1/6 interest. Your 1/6 interest gives you the right to use the home for 2 months out of the year. If you wish to have 4 months of use, then you would want to buy an additional 1/6 interest in the home, thus giving you 2/6 interest.
Why would I want to do that? Well, lets supposed that same property wasn’t being offered fractionally and was only being sold, as most properties are sold on the market, to whoever comes in with an offer to buy the entire interest in the property. That same property is on the market for $1,500,000. If you wanted to use it two months during the year and couldn’t afford to have it sit vacant, then, not only are you paying 1.5 million for it, but you have to find a renter for the property that will cooperate with the time-frame in which you wish to use the property, or you have to work around the tenants time-frame for use.
Fractional ownership gives you the ability to buy the same home at a fraction of the cost ($250,000) and use it part-time without having to find a renter for the other 10 months.
Definitely read the article. Me personally, I am definitely hesitant about this. I have a workshop to attend in a few days on this very topic, but when you go to sell your interest, you will be targeting a very specific buyer market, and will eliminate a majority of the Buyer market, since owner-occupants can only live there for 2 months. Also, why not just buy a timeshare? I want to find out if you can roll your fractional interest, ie 1031 exchange, and what limitations/advantages there are to fractional ownership. What kind, if any, mortgages are allowed.
Share ThisPosted by scott on June 26th, 2007 in Real Estate |
June 27th, 2007 at 8:56 am
Aloha,
Great subject! Investors are allowed to 1031 into a fraction. Mortgage Brokers have just started to offer financing for fractionals. Timeshares depreciate only and deeded fractions appreciate AND depreciate!
June 28th, 2007 at 6:20 am
Most homeowners are generally aware that they may defer capital gains taxes when they sell their primary residence. This is called a “1031 exchange,” and it requires that you purchase a property of similar nature and for similar use within 45 days. Though fractionals technically qualify for 1031 exchanges, this can only occur with investment properties. This requirement typically rules out fractionals called private residence clubs, which are most often used for vacation or personal occupancy. For details and to review your particular situation, consult with a tax advisor before finalizing your decision.
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June 28th, 2007 at 4:29 pm
Let me clear up a couple of inaccuracies in the comment made by Eric Schaefer. #1.Someone can NOT defer taxes on their primary residence via a 1031 tax deferred exchange. A 1031 exchange applies only to investment properties and you must roll into a “Like-Kind” property or investment.
#2. You don’t have to purchase the “replacement property” within 45 days. For the standard 1031 exchange, you have to identify, in writing, 3 pontential properties within 45 days of closing on the relinguishing property. You have 180 days from the closing of the relinguishing property (property you are rolling out of) to close on one of those 3 properties identified.
I want to see if a fractional ownership property will be able to be exchanged into a regular investment property, or if there are certain limitations (similar to how rolling into a leasehold property has limitations) Is it “like kind”? What will the mortgages be like? Since a fractional interest in a property will give you access to use the property for certain times out of the year, a 1031 may not apply, since it will most likely be used as a second home type of investment. Just because you buy a home fractionally, does not mean you can get around the zoning code that would require a 30 day minimum stay, so you probably won’t be renting it out as an investment if you only have use 2 months out of the year. Anyway…I will find out more tomorrow.
June 30th, 2007 at 4:29 am
It is apparent Scot that you have not yet done your homework regarding the fractional industry. I would suggest that all r/e agents get firmiliar with this concept as it will be the way most folks vacation in a few years! You can 1031 a fraction and you can finance a fractional share just like any second home at the same rates. The resale market is great with an over-all appreciation of 5% per year. Please visit our website to learn more about this exciting industry. Cheers, Sherman
June 30th, 2007 at 8:48 am
Absolutely Shermin. This is very, very new to Hawaii. Which is why i am trying to take the classes. I just got the tip of the iceberg introduction to it after writing this post, which really helped grasp the concept. I have another workshop to attend in two weeks to go through the details. The more the real estate industry here can learn and be knowledgable about how they work, the better they can educate buyers and sellers on if it would be a viable option for them and properly guide them through which fractionals may be best for them. I can see how it could go really wrong if not handled properly. Thanks for the input.