How to Make a Family Vacation Home Work for You
When you buy a vacation home for your family or with other family members, you’re likely imagining the relaxing and fun times you’ll have there. How to structure its ownership is probably one of the last things on your mind. But to keep the good times flowing, you’ll need to make sure that the ownership structure you choose, whether it’s a corporation, a trust, tenants in common (TIC) or a limited liability company (LLC), will serve you well going forward.
Though each structure has its pros and cons, an LLC might offer the most benefits.
Advantages of an LLC
One of the main benefits of structuring vacation home ownership as an LLC is that it will (subject to certain exceptions) limit family members’ exposure to personal liability lawsuits associated with the property. This is especially important if you plan to rent out the home when the family isn’t using it.
For example, let’s say that a guest slips while walking on the pool deck of a beach house and suffers a serious head injury. The guest successfully sues the vacation home owner and receives a six-figure award settlement. With an LLC, the owners’ personal exposure usually would be limited to the vacation home itself. The owners’ other assets, such as their main residence and investment portfolio, couldn’t be attached by the tenant.
Another big benefit is the avoidance of probate 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, if you are the sole member of the LLC, and it is treated as a “disregarded entity” for tax purposes, your heirs would be eligible for a step-up in cost basis to the home’s fair market value upon your 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.
Other benefits
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, all of the operating funds for the home could be held in one account, making it easy to allocate the income and expenses between the LLC members.
Finally, because 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.
Getting it right
You want owning your vacation home to be as carefree as possible. Though every situation is different, structuring ownership as an LLC may offer a variety of benefits. However, it’s critical to obtain professional advice.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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