FAQ about Fractional Ownership
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Below are some of the more commonly asked questions about fractional ownership.
Not directly. Title to virtually all fractional ownership properties are held in the name of a legal entity, which is usually either an American based Limited Liability Company (LLC) or a French based company called a Société Civile Immobilière (SCI). Each purchaser of a fractional ownership interest then becomes a member or stockholder in this entity, whose sole asset is the property and furnishings. The benefits are that this allows for orderly transfer of members into and out of the LLC or SCI without requiring recording of a change in title, hiring of a notaire, and the corresponding fees, each time a share is bought or sold.
No. “Transparent” entities like LLC’s and SCI’s which own property in France are strictly governed. If there appears to be any business purpose (like rental income) to the entity (or any of its members) other than group ownership of a property for personal use, the entity will be subject to an annual business tax of 3% of the property value. This is true only if the apartment is rented with furnishings, which is the case with virtually all fractional ownerships. Beware of any fractional project which tells you that the property can be rented out for income by its members! [See for example: TAJ's special report on Tax Implications of Cross Border Investments in French Real Estate (2006) and see also Michel Collet's article on Foreign Ownership of Real Property by US Individuals (2006).] Even if one does not have rental income, disclosure documents must be filed each May by the LLC or SCI to the French government listing each of the members of the entity. At Paris Home Shares, ALL of our governing documents specifically prohibit rental of the apartment by any member. However, owners are free to allow family members and guests to use their unused time, or to exchange such time with other members.
I have heard that French inheritance laws are different than in the US. Can I specify my ownership share in my will?
Yes, each ownership share can be devised in your will, like any other personal property. However, because the ownership share involves French real estate, French inheritance laws will supercede your wishes, should there be a conflict. In France, joint tenancy does not exist, and children have superior rights to a spouse. It is important that you understand the differences between French law and the laws of your country before you designate how you will show ownership of your share. There are methods to create a “joint tenancy” under French law, but it requires the assistance of French legal counsel and should be handled prior to completing your purchase. This is the case, in my opinion, for a foreign entity like an LLC. For a transparent SCI, French law treats the member shares as personal property, governed by the laws of the domicile where the member lives. So, for example, if you are a member of an SCI and wish to own in joint tenancy, or to specify a specific heir or heirs in your will for your share, you can do so without worrying about French law (if your domicile is in a country other than France). It is an important distinction between an LLC and an SCI.
There should be provisions in the governing documents of your LLC or SCI which specify the steps to be taken should you decide to sell your share. You are usually free to sell your share at any time, at whatever price you choose, subject only to a limited right of the other members of your group to purchase your share at the same price and terms once you have found a buyer. Because fractional ownership is a relatively new concept, there is not yet a ready market for such shares. However, the Internet provides many avenues for individuals to market international real estate, including fractional ownerships.
Unlike American law, the French government has a “look-through” provision which basically treats each member of an entity as though he was the actual owner of the property. Therefore, it is French capital gains taxes that must be paid when a share is sold. This is the responsibility of each member. The French government will know when a share has been sold because of the corresponding change in the member roster which is required to be filed each year by the LLC or SCI. Fortunately, French capital gains taxes are not terribly onerous, and decrease the longer that you hold your share. If the share owned is part of an LLC, the gain will be taxed at business rates of 33%. If the share owned is part of an SCI, the gain will be taxed at personal rates, which begin at 33.3% for non-EU residents and 16% for EU residents. In both cases, the capital gains tax is gradually reduced to zero if the share is held between 5-15 years. After 15 years, there is no capital gains tax due to the French government; however, depending on the Owner's domicile, capital gains tax may still be due in the Owner's home country. For US owners, it must be understood that the IRS treats all income worldwide as subject to US tax laws.
In addition to the capital gains tax, France also imposes a transfer tax of 5% of the value of the share sold. This transfer tax generally cannot be offset against other taxes due by the Owner in his home country, even if that country has a bi-lateral tax agreement with France.
Yes, because the LLC is an American corporate entity with multiple members, it is required to have both a tax identification number and to file a partnership tax return (Form 1065) annually with the IRS. Because the LLC has no income, there should never be any tax liability. If the entity is an SCI, it would correspondingly be required to file tax returns with the French government annually.
Yes and No. Fractional ownership is a hybrid of direct ownership and time sharing, combining the best elements of both. The primary difference is that with fractional ownership, one actually owns the property, whereas with a timeshare, one merely owns the right to use the property. Another important distinction is that while timeshares involve many thousands of shares in a large complex with “resort” amenities and costs and built specifically for that purpose, fractional ownership is joint ownership by only a few individuals in a single property whose value can easily be determined on the open market and for which there are very few, if any, resort amenities which must be managed and maintained (and paid for!). For us, we consider the city of Paris to be it’s own resort! Virtually no timeshares have ever been offered on the open market for 100% ownership, unlike fractional ownership properties. As timeshare projects age, the right of use becomes less attractive, which explains partially why timeshare values decrease over time. However, the value of fractional ownership shares will be correlative with the value of the property itself over time. Since I do not wish to project what will happen to Paris property values in the future, I leave that to the purchaser to decide. For those who buy their share in a currency other than euros, the value will also be affected by the currency exchange rate at any given time.
All fractional ownership projects will have the normal costs of ownership associated with owning any real property, including the costs of taxes, insurance, utilities, building dues, maintenance, management, and supplies. In addition, because fractional ownership properties come fully furnished, it is always wise to establish a reserve fund for eventual replacement of furnishings that break or become worn out. All of these costs should be considered and are assessed to each member either monthly or annually, based on a budget approved by the members each year.
Please read my disclaimer here:
Any tax or legal statement provided herein is solely expressed as my personal opinion. Any prospective purchaser who intends to rely on legal or tax opinions bearing on any topic discussed herein is strongly counseled to get professional advice from an expert on French law in such matters.
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