Usage Assignment Method
The Usage Assignment Method is a method for allocating usage rights in a co-ownership arrangement of a second, or vacation, home. In usage assignment, each owner is assigned specific dates when they will have exclusive right to the property. This exclusive right -in addition to access to the property for the owner and/or their family/friends- includes the right to rent the property as well as exchange/swap it with other co-owners.
Time Shares
On the surface, second or vacation home co-ownership seems similar to a time share arrangement. In many ways it is. However there are some key general differences. Second, or vacation, home co-ownership tends to be smaller in scale and is organized and managed by the co-owners. Time shares are typically the opposite as they are large scale enterprises that are organized and managed by people other than the owners. Time share ownership comes in the form of fixed (specific week), floating (choose from blocks of time), and rotating (different week each year) time periods. Deeded and right to use ownership methods also exist. While there are many very legitimate time share companies in existence, the time share industry is a magnet for shady developers who sell barely legal or even illegal real estate contracts.
Taxes and Second Homes
Allocating Property Taxes
Property taxes should be allocated based on percentage of ownership. If one owner sells their share, the property value will likely be reassessed resulting in a higher tax burden. The new owner should be allocated the entirety of the tax increase. Existing owners should not incur a higher tax burden because one owner decides to sell.
Tax Treatment on Second or Vacation Homes
The tax treatment on a second home depends on the degree to which the property is used for personal use versus as a rental.
Pure Second Home Tax Treatment: To qualify for mortgage and property tax deductions, the property can not be a rental for more than 14 days per tax year. Rent income is considered tax free and expenses are not deductible.
Pure Rental Property Tax Treatment: To qualify the property must be a rental for more than 14 days per tax year and the total number of owner use days is 14 or less or l0% or less of the total rental days. Expenses are divided proportionally between personal and rental use. The personal expenses, aside from mortgage interest, are not deductible. The rental expenses are deductible only if they result in losses.
Hybrid Tax Treatment: This occurs of you qualify for neither pure second home or pure rental. A hybrid tax treatment applies almost exactly like a pure rental tax treatment except rental expenses CAN offset income.
Determining Types of Use - Is it Personal Use or Rental?
Personal Use
Co-owner uses the property
Co-Owner pays usage fee
Relative of co-owner uses property (rent or no rent)
Home swap or exchange with co-owner
Pay to Use Method
The Pay to Use method is a usage allocation method where a co-owner pays a usage fee for each day/week of usage. This method can be particularly useful when the property's is located in a place where different seasons of the year make it more or less desirable (the mountains during ski season, the water during the summer, or a house near a golf course when the PGA comes to town).
Management & Expenses
Usage
Managing usage depends entirely on the method of allocating use. A Pay to Use method involves much more day to day management -perhaps even an outside management company needs to be employed- as usage fees and rental income must be collected, reservations managed, and records kept. If Usage Assignment is the method chosen, day to day management likely can be done by the co-owners with each co-owner assuming different responsibilities. In either method, detailed records of who occupies the property and at what time must be kept.
Finances
In Pay to Use allocations, the owners may want to outsource the management, including collection of payment and bill paying, to an outside country, This of course depends on the level of complexity of the Pay to Use allocation in practice. If the co-owners attempt to manage under a Pay to Use allocation, it is imperative that the group sets up a common bank account and that accounts receivable and payable are carefully managed. Each co-owner should have reasonable access to information regarding "who owes what and when" as the Pay to Use method only works if owners or renters are "paying to use it". If the property sits idle the co-owners may have to contribute additional funds to ensure all expenses are covered.
