Legal Documents Owners Should Know Something About
Fractional ownership documents fall into two general categories: (i) those that are recorded in the chain of title to the co-owned property and thereby become binding on each subsequent owner even without that owner’s signature, and (ii) those that are unrecorded and bind only those that sign them.
Most fractional arrangements involve a combination of recorded documents like deeds, and unrecorded documents like management agreements, but one should not make generalizations about the kinds of documents or their names since each seller will undoubtedly use their own. Notwithstanding the fact that there are many flavors of documents, it may be useful to become familiar with some common names being used for fractional property documents like, “Declarations”, “User Agreement”, “Agreement to Purchase Real Property”, and “Bylaws.” Since there is no uniform requirement that all documents with a particular name contain the same terms and conditions, it is key that buyers review all documents carefully to make certain that they are getting what they bargained for.
What About Taxes?
In general, the tax treatment of vacation homes depends on how often the property is used for personal use and how often it is used as a rental. When vacation property is co-owned I.R.S. regulations seem to contemplate that usage of all the co- owners (and their relatives, non-paying friends, and swappers) should be added together to determine the total number of personal use days and any other days that the property was used by someone else are considered rental days. Tax deductions for mortgage interest and property tax will depend on whether the co-owners seeking to take those deductions, qualify as “pure second home” owners by the I.R.S. As far as state law, Massachusetts seniors and veterans who qualify for certain exemptions from property tax may still qualify as fractional owners.
Tax law and other areas of law that affect fractional property purchasing like real property law, securities law and corporate law, can be very complex; therefore, fractional buyers (even those who have previously bought properties and therefore feel like they are comfortable with what it means to buy property) should seek the assistance of professionals, like lawyers, real estate agents and/or accountants when purchasing their interests.
Other Legal Restrictions to Be Aware Of
Several types of legal restrictions can apply to fractional vacation home sharing arrangements. These can be grouped in four general categories: (i) state real estate laws and regulations, (ii) local real estate laws and regulations, (iii) private deed restrictions, and (iv) federal and state securities laws. Laws in these categories vary from state to state and from municipality to municipality and, often times apply to real estate transactions regardless of what the individual transaction documents state. So it is important for buyers to check with professionals (like those mentioned above) in their home state, for advice on how these laws may affect any fractional ownership purchase, especially since these laws can often have registration and compliance requirements. Plus, where fractional property is located abroad, prospective co- owners and even their local attorney are less likely to be familiar with foreign laws. In foreign matters it is essential to involve both a U.S. attorney and a reputable foreign lawyer or law firm.