Home » Fractional Ownership Resources and Articles » General Information on Fractional Ownership » The Types and Categories of Fractional Ownership Arrangements
By Andy Sirkin
Understand the most commonly used fractional ownership terms and jargon.
“Fractional Ownership”, “Co-Ownership”, and “Shared Ownership”
Fractional ownership, co-ownership, and shared ownership can describe any arrangement where two or more people share ownership of something, whether or not they share usage. Fractional ownership seems to be emerging as the one most commonly used for time-based sharing of vacation real estate in the U.S., but co-ownership and shared ownership are often used to describe these arrangements in other English-speaking countries. The fact that an arrangement is described using one of these terms rather than another can be attributed to the seller’s personal taste and the location of the project, rather than two the project type or characteristics.
“Private Residence Club”
Generally, a private residence club (or “PRC”) involves equity ownership (although not necessarily deeded ownership) of a specific property with 4-13 owners per home. Private residence clubs tend to be on the high end of fractional ownership options with regard to unit size, amenity level and pricing. In most PRCs, usage is not unit-specific, meaning that a particular owner uses whichever unit (of appropriate size and type) happens to be available during his/her usage period.
“Destination Club” and “Vacation Club”
Destination club and vacation club mean different things to different sellers, and the definitions used here will not hold true across the board. Destination clubs and vacation clubs commonly involve multiple homes in different locations, with a usage system that allows participants to use any of the homes in the club. There are equity and non-equity variations, distinguished by whether or not the participants have an ownership interest (which can be deeded or non-deeded) in one or more homes controlled by the club. Both equity- and non-equity clubs often provide an exit strategy after a pre-set number of years of participation. In non-equity clubs, the amount received by the departing club member is generally based on the original purchase price, or on the price being charged for new memberships at the time of the member’s exit, while in equity clubs the payout is based on the market value of the properties owned by the club.
“Timeshare”
Timeshare is perhaps the most misunderstood term in the fractional vacation property lexicon, largely because many sellers want to distance themselves from the high-pressure sales tactics, poor quality, and dismal resale performance of many first generation timeshare projects. Under the common legal definition, timeshare describes any arrangement where usage of property is shared based on time, and there is no reliable distinction between properties marketed as timeshares and those marketed as fractionals or private residence clubs. Contrary to what most people think, many timeshares are deeded and many fractionals and private residence clubs are not.
“Quarter Share”
Quarter share is used to describe any fractional ownership arrangement that involves four equal shares of ownership. Most quarter share arrangements involve deeded fractional ownership of a single home or condominium, but there are exceptions to this general rule.
“Equity” versus “Non-Equity”
In equity fractional arrangements, the participants own and use the shared property, while in non-equity arrangements they only use it. Ownership may mean being named on legal title to the shared property, or owning a trust, company or other entity that owns the shared property. The property that is fractionally owned may be a single home, multiple homes, or a multi-unit resort. In general, equity fractional arrangements are less risky, provide tax advantages, give the owners a greater degree of control over the shared property, and are more likely to hold value or appreciate over time. But like all generalizations, these can be misleading, and it is important to examine the merits of each particular offering.
“Deeded” and “Titled”
In deeded and titled fractional arrangements, the participants are listed on the legal title to the property. The property that is deeded may be a single home, multiple homes, or a multi-unit resort. The advantages of deeded fractional ownership are typically exaggerated, and the disadvantages are rarely appreciated. Compared with other equity fractional vacation arrangements, the advantage of deeded ownership is superior tax treatment for U.S. taxpayers who own U.S. fractional property, but this advantage only exists if all the fractional owners use the property exclusively as a residence. Other supposed advantages, such as better resale value, more owner control, and lower risk, are illusions. Moreover, deeded ownership has some significant disadvantages compared with other types of equity fractionals. Inadequate or improperly prepared fractional ownership documents (or worse, no documents at all) cause much more significant and expensive problems in deeded ownership than in non-deeded ownership. Deeded arrangements also have more cumbersome financing and resale procedures, and higher liability risks. If the shared property is not within a country with a quick, inexpensive and efficient system for transferring ownership and a well-developed non-judicial enforcement system, deeded ownership should be avoided.
“Condominium Hotels”, “Condo Hotels”, and “Condotels”
The terms “condominium hotels”, “condo hotels”, and “condotels” usually describe a hotel that has been subdivided into condominiums, where each owner owns the entirety of a specific condominium. Management operates the hotel and shares the proceeds with the condominium owner, who can also use the property him/herself, sometimes free of charge and sometimes for a fee. When there is only one owner per condo, these arrangements are not fractional ownership. But the terms are sometimes used to describe a hotel that has not been subdivided, where the owners own a percentage of the whole development rather than the entirety of a specific room or suite. When used in this way, the terms describe a type of fractional ownership, but the arrangement does not actually involve a condominium.
About SirkinLaw APC
SirkinLaw APC has focused on real estate co-ownership since 1985, and has been involved in the creation of more than 5,000 co-ownership arrangements throughout the United States and the world. This breadth of experience allows us to draw on a huge library of fractional project documentation as well as extensive knowledge of marketing and registration requirements for virtually any location where a project might be located or potentially marketed. We pride ourselves on our ability to write legal documents in plain English, develop simple and elegant usage and organizational structures, and offer efficient, reliable and cost-effective services for fractional projects ranging in size from a single house or condominium up to hundreds of factional interests. Our firm has offices in San Francisco California, Evergreen Colorado, and Paris France.
About The Author
Andy Sirkin has been a recognized expert in fractional ownership for more than 35 years. Since 1985, he has focussed on advising and preparing contracts for small groups of families and friends who want to buy and share vacation homes as partners, and on advising and preparing contracts for sellers and real estate agents who want to market and sell fractional interests in a particular vacation home. While work with individual owner groups, buyers, sellers, and real estate agentsremains a major part of Andy’s fractional ownership practice, his work now encompasses advising and preparing contracts for web-based platforms (such as Pacaso) thatorganize, facilitate and manage fractional ownership arrangements for specific homes, and advising and preparing contracts for fractional ownershipdevelopers (who buy properties to renovated and furnish for sale as fractional ownership interests), fractional ownership marketing and sales firms, and fractional ownership management companies.
Andy has worked on fractional ownership of properties located throughout the U.S. and the world, and has also advised fractional ownership startups, platforms, developers and related businesses based in, or focussing on, locations throughout the U.S. andmany other countries. However, most of his work has involved fractional ownership in the U.S., the U.K., Western Europe, Mexico, and the Caribbean. He has been a featured speaker at many fractional ownership and timeshare conversions and symposia, an accredited instructor with the California Department of Real Estate, and a frequent interviewee on fractional ownership for podcasts and news coverage throughout the world.Andy is based in Paris, and can be contacted via thecontact form.
FAQs
Unlike short-term vacation rentals, with a fractional ownership property you own actual property, giving you the right to use the vacation home according to your share. For example, if you own one-fourth of a share in a property, you hold the right to use the property one fourth – or 3 months – of the year.
What is an example of fractional ownership? ›
Fractional ownership is where several people share the ownership of a real estate asset such as a vacation home, a house or a condo.
What is a 1 6 fractional ownership? ›
Owners buy in different increments, from 1/12 to 1/6 of the property. That fraction is converted to weeks a year. So a 1/12 share would get four weeks. A 1/6 share gets eight weeks.
Is fractional ownership the same thing as a timeshare? ›
Fractional ownership is most often seen in condo and resort communities, and while a traditional timeshare limits access to the property to one to two weeks per year, fractional ownership can allow access to the home for five weeks or more per year, depending on the number of owners per unit.
What is 1 8 fractional ownership? ›
Fractional ownership is “owning” a fraction of a property, say an 1/8th, divided not by space, but by time. In other words, in the case of an 1/8th, you own 6.5 weeks each year. How long you own it for depends on the tenure. In some cases this can be in perpetuity - in others for 50 years, and so on.
Should I avoid fractional shares? ›
Are Fractional Shares Worth It? Fractional shares are worth it if you want to start investing with little money and have your eye on some expensive shares you wouldn't normally be able to buy. They're also powerful tools for diversifying your portfolio very quickly.
How do you set up fractional ownership? ›
How to buy fractional shares
- Register an account on a brokerage company or a platform that works with fractional ownership projects.
- Deposit funds.
- Select the project.
- Choose the sum you want to invest. Some platforms offer to buy a part of stock while others enable investing of a specific sum.
Bottom line. Fractional real estate investing is one way to boost your passive income and break into real estate investing. It's a great option for investors with limited funds who don't want the burden of owning and maintaining an extra property, but it does come with work.
How does fractional ownership work? ›
Fractional ownership is an investment approach in which the cost of an asset is split between individual shareholders. All the shareholders split the benefits of the asset, such as income sharing, reduced rates, and usage rights.
What is Part 91 fractional ownership? ›
(4) A fractional ownership interest means the ownership of an interest or holding of a multi-year leasehold interest and/or a multi-year leasehold interest that is convertible into an ownership interest in a program aircraft.
A fractional share (stock slice) is when you own less than one whole share of a company. Fractional shares allow you to invest in stocks based on a dollar amount, so you may end up with a fraction of a share, a whole share, or more than one share.
Can you sell fractional ownership? ›
Perhaps the best benefit of fractional ownership is the opportunity to resell. If your fractional property increases in price or value during your period of ownership, you have the option to sell your fractional share for a profit.
What is another word for fractional ownership? ›
“Fractional Ownership”, “Co-Ownership”, and “Shared Ownership” Fractional ownership, co-ownership, and shared ownership can describe any arrangement where two or more people share ownership of something, whether or not they share usage.
Can you always buy fractional shares? ›
However, now that many brokerages offer fractional shares, investors can choose which companies they want to invest in, and can trade the fractional shares at any time—unlike a mutual fund, which is bought and sold as a “basket” of stocks.
Is fractional ownership better than a timeshare? ›
Fractional ownership is a better investment than a timeshare and is more willing to finance a purchase with fractional ownership because the buyer owns partial equity in a valuable asset. As the value of the property appreciates, the value of the purchaser's equity also appreciates.
How do you get out of fractional ownership? ›
How to cancel a fractional ownership timeshare
- Sell your fractional ownership timeshare.
- Give away your fractional ownership timeshare.
- Work directly with your timeshare company to get released from your timeshare.
- Hire a reputable timeshare exit company to cancel your fractional ownership timeshare.
Yes. In general, interest on a loan taken out to purchase a fractional residence is tax deductible.
What is the difference between REIT and fractional ownership? ›
In fractional Ownership, the investor knows where his/her property is located and what property types his money is invested into. However, in the case of REITs, professional managers pool in the money from investors and invest in rent-generating profitable real estate assets.
Why can't I sell my fractional shares? ›
The only way to sell fractional shares is through a major brokerage firm, which can join them with other fractional shares until a whole share is attained. If the selling stock does not have a high demand in the marketplace, selling the fractional shares might take longer than hoped.
What are the best fractional shares to buy? ›
The best brokers for fractional share investing:
- Fidelity Investments.
- Interactive Brokers.
- Robinhood.
- TD Ameritrade.
- E-Trade.
- Merrill Edge.
- Vanguard.
- Tastytrade.
You can sell fractional shares just as you can sell any other shares of stock you own. If you bought a half share through your brokerage and you want to sell your stake, you can simply place a sell order with the same broker and cash out your holdings.
Are fractional shares taxable? ›
How Is Cash in Lieu of Fractional Shares Taxed? Like many other forms of investment profits, cash in lieu of fractional shares is taxable, even though the payment occurred without the investor's endorsem*nt or action. Investors will pay a capital gains tax on the payment.
What are the disadvantages of fractional trading? ›
Downsides of Fractional Shares. Limited selection of stocks: Not every stock is available for fractional investing. You might not be able to choose from as many companies as you could if you bought whole shares. Liquidity: You might not have immediate asset liquidity with your fractional shares.
What is the truth about fractional ownership? ›
In fractional ownership, you own a share of the real estate itself and are issued a deed for the property, not a time that you can use the home. This keeps the costs lower than whole ownership, but you still have access to the home if you are satisfied with the sharing model.
What happens if you sell fractional shares? ›
Fractional share cannot be acquired or liquidated from the market. When liquidating an entire equity position, any remaining fractional share positions will be automatically sold at the same price as the full share order on the settlement day after the execution.
What are the pros and cons of fractional shares? ›
Pros and Cons of Fractional Shares
| Pros | Cons |
|---|
| Lowers the barrier to entering the stock market for some investors. | Fractional shares aren't offered by all types of brokerages. |
| Gives investors more control over the amount of stock they want to own. | Some brokerages may charge fees that can add up. |
1 more rowPart 91 governs general operating and flight rules for all civil, generally non-commercial aircraft, whereas Part 135's goal is to “hold [commercial] pilots, aircraft, operations and even passengers to a higher standard than would pertain to someone providing his own transportation.” Part 91's rules are always in ...
What is a part 119 operator? ›
Part 119 Certification of Air Carriers and Commercial Operators. Part 121 Domestic, Flag, and Supplemental Operations. Part 129 Foreign Air Carriers and Foreign Operators of U.S. Registered Aircraft Engaged in Common Carriage. Part 133 Rotorcraft External-Load Operations.
Is fractional real estate a security? ›
Fractional ownership is not a security but an actual percentage of ownership in a physical property. Both carry risks as all investments do, but commercial real estate is generally lower risk than residential because market fluctuations and volatility less impact it.
Why do people do fractional shares? ›
A fractional share is a smaller portion of one share. It means a company share is split into smaller portions for investors who don't wish to buy or cannot afford to buy one whole stock. Buying fractional shares is great for novice investors or everyday investors who want to diversify their portfolio and reduce risk.
Lenders normally avoid making fractional mortgages, for the simple reason that, if one participant defaults, it can be hard to foreclose. That's because other owners have a right to keep their share of the home. As a result, most fractional mortgages are offered by builders or developers.
What is fractional ownership of physical assets? ›
'Fractional' refers to the asset being equally split into fractions so that the costs can be shared. 'Ownership' is the owned interest of the fractions. Fractional ownership is where two or more people choose to co-own an asset benefitting from shared costs and benefits.
What does fractional mean in business? ›
Fractional executives are professionals who offer their management services to organizations on a for-hire, part-time basis, also known as fractional work.
What is fractional ownership luxury goods? ›
Fractional ownership is a way for people and companies to invest in luxury goods without having to spend too much money. People can access a range of assets this way, which they may not be able to afford if they bought them all themselves.
Which exchanges allow fractional shares? ›
The best brokers for fractional share investing:
Robinhood. TD Ameritrade. E-Trade. Merrill Edge.
How do you calculate profit from fractional shares? ›
Fractional Shares Profit Formula
To calculate a fractional shares profit, subtract the purchase price from the sale price, the multiply by the fractional percentage.
What is the difference between a CD and a fractional CD? ›
(Banks also offer step-up CDs directly.) Whole vs. fractional CDs: Fidelity can only be bought in increments and it defines a whole CD as having a $1,000 increment. A fractional CD has a minimum increment and minimum deposit of $100.
What are the downsides of fractional ownership? ›
Fractional buyers can expect higher maintenance, management, and HOA fees. They can often be tough to resell. And sharing space/collaborating with others on timing, decorating, etc., may pose challenges for some owners.
Is fractional home ownership a good idea? ›
Bottom line. Fractional real estate investing is one way to boost your passive income and break into real estate investing. It's a great option for investors with limited funds who don't want the burden of owning and maintaining an extra property, but it does come with work.
What are the cons of buying fractional shares? ›
Disadvantages of fractional shares
- Limits on when, how, and what you can sell.
- Fees for trading fractional shares.
- Lower dividend income and profits.
- Lack of stock voting rights.
- Risk of illiquid shares that are difficult to sell.
- Tax consequences when changing brokerages.
Often Has Low Liquidity
Liquidity tends to vary from company to company and even from project to project. Today, many companies will offer to buy out investors as long as an asset is performing well. However, investors should not invest in fractional real estate if they think they need to cash out in the near future.
How do you value fractional ownership? ›
To calculate fractional pricing multiplier, add the cost of all the fractional shares being offered in a particular home, and divide the total by the fair market value of the home. Be sure to use a realistic value for the home, meaning the price at which it would sell for in the current market in 90-180 days.
Are fractional shares risky? ›
When you buy a fraction of a share, you are treated the same as any investor with a full share. You make the same percentage gains and get the same benefits of stock ownership. You also take on the same risk of loss.
Do you pay taxes on fractional shares? ›
How Is Cash in Lieu of Fractional Shares Taxed? Like many other forms of investment profits, cash in lieu of fractional shares is taxable, even though the payment occurred without the investor's endorsem*nt or action. Investors will pay a capital gains tax on the payment.
Can you make good money on fractional shares? ›
"If a stock's price increases 10%, you'll earn 10% on your investment whether you own a fraction of a share or hundreds of shares." Fractional shares can also make it much easier for investors to diversify their portfolio across dozens of stocks at a much cheaper price point than owning full shares.
Why should I invest in fractional ownership? ›
As per Investopedia, “Fractional ownership is an investment approach in which the cost of an asset is split between individual shareholders. All the shareholders get the benefits of the asset, such as income sharing, reduced rates, and usage rights".
What is the difference between REITs and fractional ownership? ›
In fractional Ownership, the investor knows where his/her property is located and what property types his money is invested into. However, in the case of REITs, professional managers pool in the money from investors and invest in rent-generating profitable real estate assets.
