Financial Facts

I. Costs and Co-Owners

How much will my fractional cost?

The size, location, number of co-owners, and specific amenities of your lifestyle selection all affect its cost. The pricing of the fractionals is weighted, with time between November and April in Florida, for example, being slightly more costly. Time slots in most cases are aligned with the same calendar as internationally accepted timeshare weeks.

How big a fraction do I need?

If you’re the type of person who prefers to share your space with a small group of co-owners, you may wish to have a larger share of the property and of the profits if it appreciates. In a fractional, you can build up equity and later sell your interest in the property. Some people prefer to share their space with a smaller group of co-owners – and the larger your share of the property, the larger your share of the assets as it appreciates, or profits when it sells.

How many other owners will there be?

Each home has a limited number of owners. Typically fractionals are split into from 4 to perhaps 12 shares, which means that arranging time at the property is less competitive than other types of shared ownership properties. There is no requirement for you have to have contact with the other owners, since the local contact is MWSH and the particular management company selected by your Home Owners Association.

What if some of our friends want to buy a share in the same lifestyle property as ours?

Wonderful! This can be pleasant for all parties, as well as financially advantageous. Anyone bringing other buyers will enjoy a 5% discount on the first owner fractional piece. You may wish to join some friends from your neighborhood, church, or various clubs and other affiliations with whom you’d like to share a second home.

II. Financing

(As with all financial choices, seek counsel from a qualified tax professional for your individual situation)

All Cash

According to industry research, most fractional buyers pay in cash, using a variety of resources including a home equity loan on their main residence. For Americans, the IRS has determined that the loan costs for buying fractional properties can be deductible via A HELOC, so long as the loan doesn’t exceed $100,000. (see IRS Publication 936)

I’m paying cash. What happens if someone else’s mortgage gets foreclosed?

Someone else’s default would not affect any other co-owner of the fractional. A lender would be acting against only the defaulted portion. This illustrates the reason that those choosing to finance their purchase must have excellent credit and provide a significant down payment. If that portion were to be resold, co-owners would have the first right of purchase.

New Mortgage

Banks and mortgage firms consider fractionals to be appreciating assets and may treat them like any other second ­home purchase. While mortgages for buyers of vacation fractionals were initially available, at a time of global financial conservatism and uncertainty it is difficult to find individual fractional financing except through a developer. In this period of the “New Normal Economy”, the most important component of any purchase is determining the cost/value ratio: whether your personal needs as a vacation home buyer are met by the quality of the property development and appropriateness of the usage plan. Fractional loans for a secondary residence will carry slightly higher interest rates and require a larger down payment than a loan for a primary residence.

III. Tax Considerations

(As with all financial choices, seek counsel from a qualified tax professional for your individual situation)

What are the tax considerations?

Fractionals are considered a second home purchase with interest and equity benefits that go along with ownership. In the United States, tax treatment of a deeded vacation home depends on how often it is used for “personal use” and whether it is ever used for a rental. There are three possible tax treatments, each with their own rules on tax deductions: 1) “Pure Second Home”, 2) “Pure Rental Property”, and 3) “Second Home/Hobby Rental”.

Discuss with your tax professional the following data and other updates about the “Pure Second Home”:

You may have downsized to a smaller home recently, are ready to travel, and would like to use part of your tax sheltered gain to buy a second vacation home. The second-home market has been helped by the Taxpayer Relief Act of 1997, which established new rules for the treatment of a capital gain on a principal residence. The amended U.S. tax code moved from encouraging progressively larger and costlier homes to permitting downsizing from larger homes to buy a smaller, less expensive primary home and then using the tax-sheltered gain elsewhere, including making a down payment on second home used as a recreational property. In short, the “downsize and add a second home strategy”, propelled by tax-free money, can be helpful to fractional buyers.

In March 2002 an IRS ruling permitted real interest in property known as a tenancy in common, or “TIC” to qualify for tax deferrals under Section 1031 of the Internal Revenue Code. This means that people wanting to exchange into a vacation fractional can do so, and those wanting to sell have the opportunity of the entire 1031 exchangers’ market available to them.

Discuss with your tax professional the following data and other updates about renting out your fractional:

Generally speaking, the fractional you purchase as your second home is exclusively for your use or use by your family and friends, or use by other owners with similar tastes and values. It may not be used as an investment for rental use by non-owners and others unless all owners agree to both of these: 1) a rental concept is valuable to all, and 2) documentation to allow for rentals is changed, if necessary, should it not be initially permitted in the Home Owner Association documents.

IV. Sharing Expenses

How do fractional co-owners share expenses?

To purchase a deeded fractional real estate interest, the buyer pays a onetime purchase price. An annual budget for each property is established initially by the developer and then by the Home Owner’s Association. Owners make an annual or quarterly payment to cover all of the expenses associated with property ownership, its use and services. Operating expenses such as insurance, taxes, maintenance, repairs, improvements, utilities and management are usually divided in proportion to ownership, so that a 1/4th fractional owner will pay 25% of each of these expenses.

Recent trends in HOA documents show that co-owners are given the opportunity to sell after five years, with group consent, and an opportunity to reinvest in something else. This may vary by property.

V. Role of Due Diligence

What issues should I review, or have my Realtor® review, in evaluating a fractional?

  • What is per-night cost (annual cost fees & dues divided by # of days of use/year)?
  • Will I be able to control how costs, especially management fees and dues increase over time, and how property is managed?
  • Can the property be rented out? Is the rental amount charged controlled? Is this potential tax benefit or burden the primary goal of your client?
  • What restrictions apply to resale? What competition will I face within the property and in the immediate area?

VI. Who is MWSH?

My Waterside Second Home LLC, a private developer, provides two important factors. First, we are offering a product – a fractional ownership in waterside real estate in a prime location; second, we provide consulting services, the custom selection of the appropriate second or third home for the client, along with the local management of that ownership interest.

MWSH believes the fractional concept is perfect for selected parts of Florida, especially the west Florida beach communities, and offers this asset location either on the beaches or the Intercoastal. Owners will purchase an “undivided fractional fee-simple interest” in a specific condominium, single family home, townhouse, or estate which has been adapted from whole ownership. In addition, fractional owners choose from a variety of optional owner packages including housekeeping and shopping, based on individual home owner’s needs.