Timeshares and Fractional Interests get Another Look in Summit County

By Penelope L. Banks, CPA

According to Andrew Biggin of Breckenridge Associates, the real estate market for high-end residences ($1million and up) in Summit County has been "holding steady" these past two yeas; although there has been some depreciation in homes over $1 million. Market activity in the County has picked up since the Iraq war, with many investors now turning again to real estate to shore up their stock market losses and take advantage of low interest rates.

With record foreclosures in Summit County timeshares, now might be a good time to invest in condominium ownership, particularly since Summit County condominium complexes have seen some overall degree of softening. Timeshares and fractional interests, so popular several decades ago, are looking increasingly more attractive.

When timesharing first appeared several decades ago, it was a matter of "use it or lose it." The timeshare owner had no alternative but to take a two-week vacation at the same place each year. Almost immediately, however, exchange systems were created so that the theme became "use it or choose it," either time or place. Now that timeshare properties are becoming more popular, the latest approach enables the timeshare holder to acquire points that can be used for space, travel, restaurants, rental cars or other leisure uses. To retain the tie to real estate that is part of the appeal of timeshare ownership, buyers of points technically invest in a "home resort," which gives them a priority in reserving time at that particular location. In actuality, what is owned is the point value of the vacation timeshare at the home resort. Points typically expire after two years.

Paralleling the growth of traditional timeshare facilities is that of fractional ownership, defined as those selling interests ranging from 1/6 (eight weeks) to 1/12 (four weeks). The balance of the weeks, called "float time," can then be offered to members on a reservation basis. For their much higher costs, fractional interests offer a degree of exclusivity not available in timeshare projects, as well as the assurance that owners will be able to use the facility during prime times of the year. Fractional ownership has been an attractive option for individuals and corporations who want to purchase high-ticket items such as yachts or airplanes for use only certain days per year.

Now, low interest rates and a buyers' market are causing renewed interest in resort real estate. According to Kouri Wolf of Metro Brokers/Wolf Real Estate, vacation homebuyers in Summit County are using fractional ownership to leverage their buying power for homes they could not afford individually. A deeded partial ownership interest of 20-25% in a high-end property can create ownership for 10-13 weeks per year of a property worth four to fives times more than the $350,000-$500,000 paid. Frequently, the fractional home will each have four locking walk-in closets, pantry cabinets and ski/equipment spaces in the garage. The most popular location for fractional ownership is ski resorts, with golf and beach projects close behind; and an estimated 20 percent of fractional interest projects in cities or other special areas. An advantage of fractional ownership is that only about 15 percent of the price of each fractional interest represents marketing and sales costs, compared to similar costs of traditio nal timeshares, which may be 40 percent or more of the price.

Another successful approach has been to add to a fractional interest program some of the features of the traditional one or two-week timeshare program: for example, the ability to exchange use of the property for use at another property managed by the same developer.

Once again, investment in a four seasons resort area is proving to be a viable alternative for nervous stock market investors. With creative ownership concepts, real estate buyers in Summit County can own a practical and solid investment, while spreading the risk of 100% ownership. NEWS: Since there is so much foreign investment in the mountain communities, realtors, brokers and title companies need to be aware of final regulations governing the sale of real estate by foreign investors for dispositions after November 3, 2003. Under FIRPTA, buyers from foreign sellers of U.S. real estate need to withhold 10% of the gross sales price, as well as 2% Colorado withholding. Before final regulations, refunds requested for over payment of withholding could be requested in the investor's tax return, and a taxpayer identification number (TIN) was not necessary until the return was filed to claim the refund. After November 3, 2003, it appears that a foreign investor without a TIN will not be entitled to a refund. It takes the IRS 6-8 weeks to assign a TIN. Real estate professionals therefore need to inform their foreign sellers as soon as a property is listed that TINs must be completed immediately either through a Foreign Acceptance Agent if the investor is in America, or through their nearest American Embassy or Consulate

Penelope L. Banks is a tax partner and Certifying Acceptance Agent in the Frisco office of Gordon, Hughes & Banks, LLP. She can be reached at (970) 668-5707 or (877) 882-9821 toll free. She is also a Certifying Acceptance Agent for foreign TINs. This article appeared in the September 3, 2003 issue of the Colorado Real Estate Journal.