Legal Implications and Tax Considerations
Like my brother-in-law’s property partnership story, the legal side of fractional ownership needs careful planning. When you buy into a property with others, you have two main ways to structure it: direct ownership on the deed or ownership through an LLC.
The LLC route often makes more sense, especially for larger groups. Why? Because it makes everything clearer – from who owes what for maintenance to how decisions get made. Plus, it gives you that sweet liability protection if something goes wrong (and in real estate, something always goes wrong eventually).
There’s a tax benefit most people miss: when you own fractional shares through platforms like Arrived or Ark7, you still get real estate tax perks. It can be depreciation deductions, write-offs for property expenses, and a lower long-term capital gains rate when you sell.
Even better – some syndication deals use accelerated depreciation strategies that let you show paper losses while your bank account grows.
Exit Strategies
Remember how I mentioned that Ark7 and Lofty have secondary marketplaces? That’s huge. Traditional fractional ownership can be like Hotel California – you can check out anytime, but you might never leave. Like stocks, these newer platforms let you sell your shares whenever you want.
However, if you’re going the direct partnership route, like buying a duplex with your cousin, you need a “buy-sell agreement.” This spells out exactly what happens if one owner wants out.
For example, you might give other owners first dibs at a pre-agreed price formula. Or set rules for bringing in a new partner. Without this, you could end up stuck with an investment you can’t unload.
Owner Usage Rules
If you’re buying into a property you plan to use (like those beach house shares on Arrived), usage rights are everything. The smartest setups I’ve seen use a point system – prime weeks cost more points, off-season less. You get a certain number of points each year to use however you want.
For pure investment properties, it’s simpler. Your ownership percentage determines your share of rental income and expenses. Most platforms handle all this automatically—they collect the rent, pay the bills, and deposit your share monthly or quarterly. There are no late-night calls about clogged toilets or hunting down rent checks.
Want to get started? For $40 total ($20 each in Ark7 and Fundrise), you can test both approaches – direct property shares and diversified funds. That’s less than a dinner out; you’ll learn more about fractional ownership by doing it than by reading about it.
FAQs About Fractional Ownership of Real Estate
Do you Still have questions about fractional real estate ownership? We’ve got you covered.
How much do I need for fractional real estate investing?
It depends on how you go about it. To buy fractional shares in a rental property on Ark7, you only need $20 (or $50 on Lofty or $100 on Arrived).
It costs even less to invest in the pooled funds offered by Fundrise. You can start investing with $10. Alternatively, you can invest in public REITs for the cost of a single share (typically $10-100).
To directly buy a property with a partner (or several), you likely need thousands of dollars to cover the down payment on the rental property, closing costs, and repair costs. Through our Co-Investing Club, you can buy into real estate syndications with as little as $5,000. If you invest without a club, expect a minimum investment of $50,000 or more in most cases.
Do I need a legal entity to invest?
No, you don’t. However, if you buy a property directly with partners, it may be easier to list the partnership’s rules and for owners to buy each other out.
What does owning a property as “tenants in common” mean?
When multiple partners own property through tenancy in common, each owner can sell or transfer their percentage of the ownership without the other owners’ permission.
When partners die, their ownership percentage is included in their estate and distributed according to their last will. Thus, there’s no right of survivorship: the other owners don’t automatically receive a partner’s share upon their death.
Can I get a loan for fractional real estate ownership?
If you buy a property directly with partners, you can finance it with a mortgage. That remains true whether you buy as tenants in common, joint tenants, or through a legal entity such as an LLC (read up on how to get a mortgage as an LLC).
As for real estate crowdfunding or syndications, you can’t borrow a mortgage loan. However, you could theoretically borrow a personal loan or unsecured business lines of credit and use the funds to invest in real estate syndications or crowdfunding.
You can also buy public REITs on margin through your brokerage account, although I don’t recommend it.
What are my responsibilities as a fractional owner?
It depends on the fractional ownership model you use.
If you invest in a real estate syndication, REIT, or real estate crowdfunding investment, you don’t have any responsibilities or obligations. It’s a passive investment — you just write a check, sit back, and collect returns.
If you buy a property directly with partners, you negotiate the responsibilities with the other partners. One person might take on most of the labor of managing contractors and tenants, or several partners might share them.
Is fractional ownership a good investment?
It certainly can be, but it isn’t necessarily. Every investment comes with risk, and it’s up to you to analyze that risk compared to the potential returns.
You and a partner could buy a great rental property at a fantastic price. Or you could overpay on a shoddy property. For that matter, you could score a good deal and still earn low returns or lose money if you do a bad job screening tenants or rent to a professional tenant.
Final Thoughts
The fractional investment model has made it far easier to invest in real estate over the last few years. Because you can invest less cash, you can get started earlier, giving your investment more time to deliver compound returns.
Beyond the low barrier to entry, you can spread your money across many properties. That makes diversifying and investing a small amount in a wide real estate portfolio easy.
Don’t know where to start? Try investing $20 in Fundrise and $20 in a property on Ark7. For $40 total, you become a fractional investor in many real estate assets.♦
What are your experiences with fractional property ownership? If you haven’t invested in fractional real estate ownership, what’s held you back?
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