Real estate is more than just your primary residence. It can include other real estate such as a vacation home or a rental property. Depending upon the type of real estate you own, the ideal form of title can vary. Below, we take a look at the different types of real estate and make suggestions about the best form of ownership for each.
Because of the special tax treatment a primary residence receives, you need to very carefully consider how your home is owned. In Texas, if you are married, your home is generally titled in the name of you and your spouse. This allows for your primary residence to qualify for the homestead exemption, but upon the death of a spouse, the home does not automatically transfer to the survivor. You can also own a home jointly with rights of survivorship, but this must be done either in the deed or in a separate agreement. Transferring ownership of the primary residence to a joint revocable trust (also known as a “living trust”) is also an option. 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. And if the trust is drafted properly, it can be a “‘qualifying trust” meaning that it will still qualify for the homestead exemption.
If you are single, owning the property in your sole name allows you to take advantage of tax benefits for primary residences. Similarly, 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.
Also note that the bankruptcy code in Texas provides protections for a primary residence (with some exceptions and limitations). In Texas, transferring a primary residence to a revocable trust preserves those protections.
For some families, the vacation home has high monetary value, but also significant emotional value as well. Ownership of a vacation home by a trust or limited liability company (LLC) can be advantageous because it addresses two main priorities: ease of transfer to the next generation and asset protection. (Note that not all trusts provide asset protection.)
With a trust or LLC, you are able to determine a set of 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. 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 the 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 assets of the LLC to satisfy its claims, not your personal assets or those of the other members. Also, if you or another member have a judgment entered against you 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 on the vacation home to the next generation without having to worry about the individual financial situation of each of the new members.
Note: In some states, single member LLCs (an LLC in which you are the only member) do 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 affect by 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 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.
As a stream of income, instead of a residence, the biggest concern with rental property is usually asset protection. Because the occupants of the rental property can change over time, as a landlord and owner of rental property, there is a higher probability of lawsuits arising in connection with it. For rental property, transferring ownership to an LLC is a great option. If a renter gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any property insurance you have, the renter can only go after the assets owned by the LLC, not your personal assets or those of any other owners of the LLC, to satisfy any claims.
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.
Give Us a Call Today!
Whether you are concerned about your primary residence, family cabin, or rental property, we are here to assist you in protecting this valuable asset. Due to 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.
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.