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FREQUENTLY ASKED QUESTIONS
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Fractional Ownership and Interval Ownership are the same thing, said
two different
ways. A fraction means a part of something, such as one-half,
one-third or one-quarter. In real property projects, we usually
divide the ownership into six pieces, each being a one-sixth
interest. An “interval” is a period of time, such as a day, a week,
a month or a year. In our real estate projects we usually use
intervals of sixty days or more, approximately one-sixth of a year.
Each “fraction” of one-sixth gets the use of sixty or sixty-one days
every year (allowing a few days for maintenance and repair)
reflecting that 365 days does not divide exactly into six equal
intervals of a number of days.
HOW IS THIS TYPE OF OWNERSHIP DIFFERENT FROM NORMAL OWNERSHIP?
“Normal” ownership is what we call sole ownership in “fee simple.” That means you own all of the property by yourself. If it is a house and lot, you own the land and the building(s) on the lot, forever. If it is a typical condominium, you own the airspace inside the condominium, including all the furniture, fixtures and equipment inside, as well as the right to use all the shared amenities (pool, sidewalks, parking lot, beach access, tennis courts, etc.) of the particular project, the same as any other condominium owner. There are many variations on this, such as leasehold condominiums (where you get to use the property for a specific number of years) and some have assigned parking for each unit, some have cars or boats owned by several owners together, some allow businesses to operate, such as a restaurant or shop, some have specific things for part of the project and different things for other parts of the project. Fee simple owners pay all the taxes, insurance, maintenance, repairs, utilities and other expenses by themselves. All expenses and all uses are by a single owner, even if it is a partnership, LLC, family trust, etc. You cannot divide up time or space legally in most cases. “Fractional” owners share all expenses and uses according to how big a fraction you own. A one-sixth owner usually gets to use one-sixth of the days of the year and pays one-sixth of the taxes, insurance, repairs and remodeling of the property. Fractional owners share the management and decision-making power for the property, so there is usually a committee of six that talk at least once a year to decide what to do with the property.
WHAT FINANCING IS AVAILABLE TO BUY AN INTERVAL IN A PROJECT? CAN I GET MY OWN FINANCING?
Each project is different. Some lenders allow the developer to sell intervals with promissory notes and mortgages. Usually you must put 20% or more down with approved credit, but as little as 10% down depending on underwriting guidelines. If you have strong credit and good banking relationships, you may be able to get a better rate than the Developer can offer, which you are welcome to do. Not very many lenders are currently in the fraction all ending market and we expect it may take a year or two for more lenders to provide loans, so the project lender may be the best option for you.
WHEN YOU BUY, DO YOU BECOME A MEMBER OF ONE OR MORE ASSOCIATIONS? WHY?
YES, there are two associations for condo projects, one for the Condominium project and one for the Fractional Ownership project. With a house, there is only one association—the association for the Fractional Ownership project. Each association takes care of the things that are of unique concern to either the entire condo project or just the group of fractional owners.
Yes, you can rent out your time, or you can use a rental or property management company. However, you cannot usually do both at the same time. If too many people decide to do their own rentals, it may be hard to get a professional management arrangement.
CAN I TRADE MY WEEKS WITH OTHER OWNERS?
Yes, part of the ownership plan includes the right to trade time with other owners in the plan or you can do it yourself.
AM I RESPONSIBLE FOR ANY KIND OF ROOM TAX?
Legally, yes. As a practical matter, the taxes are paid by the guest renting the unit, including the General Excise Tax of 4% and a Transient accommodation tax of 7.25%, which you or your manager will collect and must be paid to the State of Hawaii. It is your personal responsibility, so it is a lot safer if we always use qualified rental agents to collect and file the returns and make the payments for you.
HOW ARE THE PROPERTY TAXES PAID ON THE UNITS?
All taxes are collected annually from the interval owners and paid by the Plan Manager or through the Fractional Ownership Plan. Each owner will receive a copy of the tax bill showing the total and the calculation of the individual 1/6th tax portion each interval must pay.
DOES THE PROPERTY QUALIFY FOR A 1031 EXCHANGE? HOW ABOUT A SECOND HOME FOR TAX PURPOSES?
Generally speaking, any investment property can be used in a 1031 exchange. You could view this property as either an investment or a second home. The rules are different, and depending on your plans and your actual use of the property, the answer might change. Each transaction is evaluated with a combination of factors, and you must consult with your tax professional on your personal situation. It is safe to say, in general, that buying an interest in a Hawaii house or condominium is an appropriate investment and could also be a second home. There are exceptions. Ask.
* The above content is the courtesy and credits of HOMESHARE HAWAII
LLC, and Steven R. Lee, Attorney At Law
