Vacation Properties
Now that summer is here, many of us are taking vacations, looking into purchasing our dream vacation home, or visiting our own vacation home.
From a wealth planning standpoint, a first question is: “How should my vacation home be titled?” To answer this, we want to consider some key goals you probably have including:
- Protecting the property’s equity in case of lawsuits against the owner(s) of the home
- Avoiding unnecessary court proceedings, like probate
- If the home will be rented, protecting the owner(s) against liability arising from its use by others
- State-specific rules, in particular we see questions about qualifying for the best property tax rates and avoiding unnecessary deed transfer fees
Vacation Homes that are 100% Personal Use.
For married couples who own a North Carolina vacation home, all four of the above objectives can often be covered by holding the property in the names of both spouses, joint with right of survivorship (also referred to as Tenants by the Entirety.) For couples who wish to take an additional step and avoid court supervision even in the case of simultaneous death, we can help them title the property into their Revocable Living Trusts. Some states, however, like South Carolina, do not give the same protection to jointly held marital real estate. In these cases, we look to Trusts to help achieve some or all of these goals. Where a Trust is the right answer, our firm can often assist by preparing a simple deed transferring the property to your Trust.
An advantage of having your vacation home titled to your Trust is that its subsequent transfer at your passing will avoid probate and streamline your beneficiaries’ access to that property at your death. Even if you have a relatively simple estate, probate can eat up time and resources that not only delay your loved ones’ receipt of your assets but can also add significant stress in settling your estate. Typically, if you own a vacation home, there are additional probate proceedings that must be completed in the county of the vacation property in addition to the probate proceeding in the county of your primary residence. This can become a costly endeavor which can be avoided with relatively straightforward planning on the front end.
Vacation Homes that are NOT 100% Personal Use.
Do you rent your vacation home when you aren’t using it? If so, we suggest forming a limited liability company (“LLC”) to own your home and operate that rental property. This helps protect your personal assets from liability arising from the rental of that property (e.g., slip and fall, unsafe condition, etc.). If a well-structured LLC is in place, the person suing can generally only go after the assets held in the LLC, and not the other personal assets held in your name.
There can be tax benefits to holding the vacation rental property in an LLC as well. An LLC is normally treated as a pass-through entity for tax purposes, which means that profits and losses flow through to each member of the LLC, usually based on the percentage of ownership. Members of the LLC then report income or loss on their individual income tax returns and pay taxes based on their personal income tax rate (rather than corporate tax rates).
Another advantage of the LLC is that LLC members can easily transfer their ownership interest by simply giving some percentage of their interest in the LLC to their heirs (either during lifetime or at their death). In this case, the transfer documents are completed within the LLC and not through a deed transfer or filings with the Secretary of State. This can be a convenient way to facilitate annual gifting to children or grandchildren where that is desired.
If you wish to discuss the title to your currently held vacation property or what options might fit for your vacation rental property, please contact Stewart Law and ask to speak with one of our attorneys.
About the Author
Hillary E. Mims
NC State Bar Certified Paralegal