If you are thinking about buying a vacation home, careful planning is needed to choose the best form of ownership.
There are several different ownership structures that can be used for family vacation homes, including a corporation, trust, tenants in common (TIC), and limited liability company (LLC). Given the unique aspects of vacation home ownership, an LLC is often the best ownership structure from a management and tax standpoint.
Different areas impacted
The ownership structure chosen for a family vacation home will impact several areas that are often relevant to vacation home ownership, including:
- Asset and creditor protection,
- Estate and gift planning,
- Sale of ownership interests to nonfamily members,
- Income and expense allocation and recordkeeping, and
- Intrafamily ownership transfers.
One of the main benefits of structuring a vacation home as an LLC is that it will (subject to certain exceptions) limit family members’ exposure to personal liability lawsuits associated with the property. This includes litigation brought on by tenants who’re injured on the property, personal judgments unrelated to the vacation home, and lawsuits filed by creditors that supply goods and services to the LLC.
For example, let’s say that a tenant slips while walking on the pool deck of a beach house and suffers a serious head injury. The tenant successfully sues the vacation home owner and receives a six-figure award settlement. With an LLC, the owner’s personal exposure usually would be limited to the vacation home itself. The owner’s other assets, such as his or her main residence and investment portfolio, couldn’t be attached by the tenant.
Another big benefit is the avoidance of probate in certain situations when a vacation home owner dies. If the vacation home is owned outright, instead of through an ownership interest in the LLC, most likely the estate will need to be probated. This could be particularly burdensome if the vacation property is in a state different from the one in which the owner’s primary residence is located.
Also, with an LLC, the heirs would be eligible for a step-up in cost basis to the home’s fair market value upon the owner’s death, just as they would if the property had been owned outright. The increased basis, of course, can reduce capital gains taxes when the home is sold.
Often, families wish to keep ownership of a vacation home in the family over the long term. With an LLC, transfer restrictions can be included in the operating agreement that prevent the individual co-owners from selling their interest in the home to nonfamily members. Restrictions also can be placed on selling ownership interests to owners’ former spouses, the use of the home by nonfamily members, and transfers of ownership interest among family members.
Choosing an LLC as the ownership structure for a vacation home also can help simplify recordkeeping. The LLC is its own separate entity. So, it can hold operating funds for the home. This allows ownership and operating expenses incurred by family members to be allocated in proportion to each person’s usage of the home and payment of expenses. Additionally, any rental income can be easily allocated among family members.
Finally, since ownership interests in an LLC represent the personal property of family members, intrafamily transfers of these interests don’t involve the conveyance of real property. Therefore, these transfers won’t result in real property transfer taxes and fees or affect title insurance policies and rights.
Could you benefit?
This column is for information only and is not intended as advice. The details of vacation home ownership can be complex, so consider talking with your financial and tax advisers for detailed guidance.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners LLC, (www.GRILL1.com) certified public accountants and advisors to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.