Real estate encompasses not only one’s primary residence but also other real estate such as a vacation home or a rental property. The ideal form of ownership varies depending on the real estate you own. Below we consider the different types of real estate and offer advice about the best form of ownership for each.
Because your primary residence receives special tax treatment, carefully consider how your home is owned. In some states, including Florida, owning real estate as Tenancy by the Entirety offers married couples creditor protection from the creditors of one spouse (with a possible exception for federal tax liens) while still preserving tax benefits. Tenancy by the Entirety also allows automatic transfer of ownership to the surviving spouse upon the death of the first spouse without court involvement. Transferring ownership of the primary residence to a joint revocable trust may also be an option if you live in a state that allows the tenancy of the entirety protection to transfer to the joint revocable trust. 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 the trust document.
If you are single, owning the property in your name allows you to take advantage of tax benefits for primary residences. Transferring ownership to a revocable living trust may also allow you to retain the 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 protect 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. In Florida, you may transfer ownership of your Homestead to a trust without losing the homestead exemption if your trust includes language in reserving the homestead exemption for you to continue to use. You should meet with a knowledgeable estate planning or real estate attorney before transferring your primary residence to a trust.
For some families, their vacation home has not only high monetary value but also significant emotional value. Ownership of a vacation home by a trust or limited liability company (LLC) can be advantageous because it addresses two main priorities: (1) ease of transfer to the next generation; and (2) asset protection.
With a trust or LLC, you can establish rules for how the vacation home is to be used and maintained, and explicitly state what is to happen to the vacation home once you pass away. This can be a great solution to ensure 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. 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 quite challenging for a creditor to force a sale of the vacation home. This can be 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.
Important for Florida: In Florida, 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 no other members will be negatively affected by seizure of money and property owned by the LLC.
If the vacation home has been in the family for many years, consult with us and 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 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 should legally protect yourself from lawsuits arising in connection with the real estate. Transferring ownership of the rental property to an LLC is a good option. If a renter gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any liability insurance you have, the renter can seek satisfaction of any claims only from the accounts and property owned by the LLC, 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, the LLC’s protection in Florida is only available if you have two or more LLC members.
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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 considerations for selecting how to own real estate, it is important to have the right advisors helping you along the way. Contact us at (813) 852-6500 so we can discuss your current and future real estate ventures and the best way to protect them for generations to come.