What is Fractional Ownership?

Fractional ownership simply means dividing an asset into portions or shares.

The term ‘fractional ownership' has been used in recent years by developers structuring property sales in this way, but in fact, fractional ownership of real estate has always existed. For years, families and friends have understood the advantage of purchasing property jointly, especially if the intent is to use the property part-time. In California, the real estate structure of tenancy in common has been used for decades as an adaptation to ownership laws for apartment buildings.

Current offerings now offer this shared asset structure to small groups of strangers, providing an opportunity for joint investment. Now, instead of finding a group of people and deciding together which asset to purchase, interested investors can find the asset while the developer takes care of structuring the purchase and finding other like-minded individuals to share the benefits. The industry has seen an explosion in support offerings for small fractional ownership groups, including financing, resale brokerage, and property management and exchange services.

How fractional ownership works
Typically, a company is formed to hold the title to the real property. The fractional owners or investors, typically 5-12, then own shares in that company. This structure allows the fractional shares to be transferred more easily, without the need to make changes on the property title, thus avoiding certain tax consequences.

With fractional ownership, each shareholder has certain usage rights, usually in the form of weeks of use. While the freedom and usage benefits sound similar to what used to be called a timeshare, there is a fundamental difference, fractional owners actually own a share of the title, as opposed to simply owning time. Therefore, if the property appreciates in value, so do the fractional shares. As with sole ownership, fractional owners are free to sell, gift or will their shares as they wish.

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