June 2015

Ideas for Vacation Homes

Living in a state like North Carolina, we are fortunate to have both beautiful coasts and mountains. Many of our clients own, or have considered buying, second homes. Here are some ideas on how you may want to hold title to your home.

A threshold question is whether the home will be rented to others. If so, owning it inside an LLC or other limited liability entity is definitely recommended. In some cases, this could be combined with other techniques, such as trusts.

Common goals regarding vacation homes:

  • Protect the Vacation Home from Creditors who have claim against an Owner. In North Carolina, holding real estate jointly as tenants by the entirety between a husband and wife (or their revocable trusts) will protect the asset from being lost to a creditor who has a claim against only the husband or only the wife. This is true except for a claim by the IRS. However, in South Carolina this special protection is not available, so husband and wife joint ownership is less valuable.
  • Avoiding Ancillary Probate. If you own an out-of-state home in your name, a separate probate process may be required upon your death. Your incapacity may also lead to increased administrative cost in dealing with the residence. Owning the home in your revocable living trust or a North Carolina limited liability entity can reduce costs in both of these cases.
  • Protect other assets from accidents at the Vacation Home. If the home will be used for paid rentals, you should certainly consider owning it in an entity that offers limited liability protection, such as an LLC. (A corporation could also be used, but is generally less favorable.) Doing so can help reduce the chances of losing other personal assets because of an injury at the home.
  • Reduce Estate Taxes. There are a number of strategies that have multiple benefits, including possibly reducing the estate taxes that will be due as a result of the inclusion of the home in your taxable estate. A simple strategy involves giving fractional shares of the home to other family members such as children. The remaining portion that you own will be considerably less valuable. Of course you also need to consider putting agreements in place among all the owners to help avoid possible disputes later. Conservation easements, where you agree to limit future development of the property, can also reduce its value. Trusts, such as Qualified Personal Residence Trusts (QPRTs), can reduce the cost of giving the home to your heirs at a date in the future selected by you.
  • Reduce Property Taxes. In some cases, local residents get a break on property taxes. If any of the owners can qualify as a local resident, consider ensuring that their ownership share is sufficient to qualify for the tax reduction.
  • Transfer the Home to Children. Smaller ownership shares can be transferred to children through LLC Units (such as where the vacation home is being rented) or fractional interests. Again, QPRTs can be used to transfer the home to children over a longer period of time at a reduced gift tax cost.

Naturally, in many cases you will have more than 1 of these goals. We'd welcome the opportunity to have a conversation with you and help you decide the best techniques for your particular situation.