Tuesday, January 03, 2006

 

Americans Are Buying Second Timeshare Homes By The Slice

Just like leisure-starved Americans who sneak away for a weekend when a long holiday isn't practical, people who want a second home can opt for a smaller slice of that dream.

While the "timeshare" idea has been around a long time, other options are proliferating, going "fractional ownership," "private residence clubs," "non-equity clubs," and "condo-hotel" or "condotel."

Not all of these options share the characteristics of owning real estate, like the deductibility of mortgage interest and profit on resale.

It's a mistake to consider a timeshare a real estate investment; it's really an investment in a vacation, says notes Richard Ragatz, president of Ragatz Associates, a resort research firm based in Eugene, Ore.

The term "timeshare," according to the American Resort Development Association, a Washington, D.C., trade group, refers to "multiple owners sharing the same vacation property, such as a condominium, and utilizing it for a specified time period. Ownership could be in the form of a deed, right to use, points program, or other purchase structure."

Timeshare owners probably can't expect to sell their share at a profit, as they might a vacation home, Ragatz says.

Moreover, buyers of second homes who get a mortgage to pay for the property can deduct the interest charges on the loan. Many buyers of new timeshares can get a loan from the developer, but the interest is deductible only when the loan is secured by a deed for the timeshare property, says Robert J. Webb, an Orlando-based senior partner in the hospitality practice of law firm Baker & Hostetler LLP.

Rules for deductibility on a loan to buy a timeshare or other property are outlined in IRS Publication 936, Webb says. If someone elects to use a home equity loan to buy a time share or other type of vacation property, that interest is deductible, as long as the loan doesn't exceed $100,000, he says. Because interest deductibility issues can get complicated, Webb recommends first consulting a tax adviser.

A related, but distinctly different model from the time share, are "fractional ownership" or "fractional interest" resorts.

As of last spring, about 150 resorts offered fractional interests, according to a recent Ragatz Associates report. That doesn't count many smaller clusters of condos or houses sold on a fractional basis, Ragatz says.

"The idea of fractionals has been around as long as vacation homes have," Ragatz says. "For a long time, friends have come together to buy a vacation home. It's about the last five years that a whole industry has sprung up oriented to fractionals."

While timeshares are typically sold in weekly increments, fractionals are sold in bundles of weeks, Ragatz explains.

Fractionals are a real estate investment, and a pricey one at that, Ragatz says, with the average sale price at $650 a square foot. These properties are often located at posh resorts, and include amenities like concierge services.

Fractional owners get a deed for their share of the property, Webb notes. Many developers don't provide financing for fractionals, however, and buyers often finance a fractional purchase with an equity loan on their principal residence.

So far, fractional resales have fetched about a 10 percent return, according to Ragatz.

However, there is a sub-type of fractional known as a "non-equity club" that is "not a pure real estate investment," Ragatz says. With these, owners buy membership in a club that entitles them to use a variety of resort homes. They don't receive a property deed.

Finally, a "condo hotel" is a condo in a complex managed by a resort. Vacationers book nights in a privately owned condo, Ragatz explains. Condotel owners must also use it themselves a certain number of days if they intend to deduct interest on their purchase loan, Webb says.

It's a confusing landscape, and will become even more so as developers meld elements from one option into another. Buyers should first examine what they want -- such as property they can resell at a profit or property that they can collect rent on -- and then vigorously research whether that aim is feasible, Webb says.

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