Real estate encompasses not only one’s primary residence but also another real estate such as a vacation home or a rental property. The ideal form of ownership varies depending on the type of real estate you own. Below, we take a look at the different types of real estate and provide some options for ownership for each common type of residential property.
Because your primary residence receives special tax treatment, you should carefully consider how your home is owned. In some states, tenancy with rights of survivorship can provide married couples with some creditor protection (provided a Homestead is duly recorded) from judgment creditors of one of the spouses (with a possible exception for federal tax liens) while still preserving relevant tax benefits. It also allows automatic transfer of ownership to the surviving spouse upon the death of the first spouse without court involvement provided that it is held with rights of survivorship.
Transferring ownership of the primary residence to a joint revocable trust may also be an option that can provide the relevant tax benefits and creditor protection so long as a homestead is duly recorded. Ownership by the trust also means that the real estate will not go through the lengthy, expensive, and public probate process but will instead be handled according to your wishes as specified in your trust document.
If you are single, owning the property in your name allows you to take advantage of tax benefits for primary residences. And again the creditor protection is available by and through a Homestead. Transferring ownership to a revocable living trust may also allow you to retain the applicable tax benefits with the added benefit of avoiding the probate process. If asset protection is a major concern during your lifetime, certain types of irrevocable trusts are best suited for your needs but may require you to give up some control of the property.
The bankruptcy code may provide additional protections for a primary residence (e.g., your state may have a homestead exemption). However, in some states, transferring your primary residence to a trust may eliminate the homestead exemption because the trust rather than you (the debtor) will be deemed to be the owner of the residence. If this situation could apply to you, it is important that you meet with a knowledgeable estate planning attorney before transferring your primary residence to a trust.
For some families, their vacation home is an opportunity to spend time with families, and with the short vacation rental industry evolving, is a way to generate additional income. Ownership of a vacation home by a limited liability company (LLC) can be advantageous because it addresses three main priorities: ease of management, ease of transfer, and asset protection.
With an LLC, which can be owned individually or by a revocable living trust, you are able to establish rules for how the property is to be used and maintained, as well as designate what is to happen to the vacation home once you pass away provided that those wises are set forth in both the operating agreement and your estate plan to provide uniformity and a comprehensive plan. This can be a great solution if you want to ensure that the vacation home stays in the family for generations with minimal family conflicts.
An additional benefit of having an LLC own your vacation home is that it provides limited liability from outside claims and your personal assets in the event something occurs at the property. If a judgment is entered against the LLC, the creditor is limited to the accounts or property owned by the LLC to satisfy the creditor’s claims and cannot look to your personal accounts or property or those of the other members. Also, if a judgment is entered against you or another member for a claim unrelated to the LLC, it will be harder for a creditor to force a sale of the vacation home. This can be incredibly helpful if you wish to pass the vacation home on to the next generation without worrying about the individual financial situation of each new member.
Note: In some states, a single-member LLC (an LLC in which you are the only member) does not enjoy the same protection from your personal creditors. The rationale of these laws is that your creditors should be able to seek relief through your LLC interests to satisfy their claims because there are no other members that will be negatively impacted by the seizure of money and property owned by the LLC.
If the vacation home has been in the family for many years, it is important to consult with our experienced real property and estate planning attorneys in conjunction with your tax advisor to make sure that transferring your vacation home to a trust or LLC will not cause an increase in your property taxes, incur local transfer taxes or other unintended consequences.
Because rental property is an income stream rather than a residence, asset protection is usually the primary concern. As a landlord and owner of rental property, you face a higher probability of lawsuits arising in connection with the property because the occupants can change over time. This highlights the importance of proper insurance for both you and the tenant but also emphasizes the importance of how you own rental property. Transferring ownership of the rental property to an LLC is a great option. Again, the LLC can be owned individually or through revocable living trusts. If a tenant gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any property insurance you have, the tenant can potentially seek satisfaction of any claims only from the accounts and property owned by the LLC, but not from your personal accounts and property or those of any other owners of the LLC.
In addition, ownership by the LLC may protect the rental property from your personal creditors. However, if you are forming a single-member LLC, it is important to have us check state law to make sure creditor protection is available.
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Whether you are concerned about your primary residence, family cabin, or rental property, we are here to assist you in protecting your valuable property. Given the various considerations for selecting a form of ownership, it is important to have the right advisors helping you along the way. Give us a call so we can discuss your current and future real estate ventures and the best way to protect them for generations to come. You can call us at 775 882 8032 or schedule a consultation with us through our website by clicking here.