How to Own Your Real Estate

You may own real estate other than just your primary residence, such as a vacation home or a rental property. Depending upon the type of real estate you own, the ideal form of ownership can vary. Let’s take a look at some different types of real estate and consider the best form of ownership for each.

Primary Residence

There are several things to consider with how you own your personal residence. First, if your home is classified properly as a personal residence, better rates are available on property taxes. Next, in Michigan and some other states, property owned as “tenancy by the entirety” (“TBE”) offers married couples creditor protection from the creditors of one of the spouses while still preserving relevant tax benefits. TBE ownership also provides for the automatic transfer of ownership to the surviving spouse upon the death of the first spouse, without court involvement. Some states treat a primary residence owned by a married couple’s joint revocable trust with the same TBE benefits as if owned together in their individual names. Property owned by the trust will avoid a lengthy, expensive, and public probate process and instead be handled according to your wishes as specified in the trust document.

If you are single, owning the property in your sole name allows you to take advantage of tax benefits for primary residences. Transferring ownership to a revocable living trust will also allow you to retain the applicable 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.

Also note that the bankruptcy code may provide additional protections for a primary residence (i.e. 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 will be deemed to be the owner of the residence rather than the debtor. If this situation could apply to you, it is important that you meet with a knowledgeable estate planning attorney before making any transfers of your primary residence to a trust.

Vacation Home

For many families, a vacation home has high monetary value as well as significant emotional value. Ownership of a vacation home by a trust or limited liability company (LLC) can address multiple priorities — ease of transfer to the next generation and asset protection.

With a trust or LLC, you can determine what happens to the property after you pass away and establish guidelines and rules for how the property is to be used and maintained. 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.

If the vacation home is owned by an LLC, you also will benefit in 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 arrangement 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 impacted their seizure of money and property owned by the LLC. A multi-member LLC can be considered to provide additional protection, even if the members have disproportionate percentages of ownership.

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.

Rental Property

If you own rental property, a big concern usually is asset protection. 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. Again, consider if your state provides more protection if the LLC is a multi-member LLC instead of owned just by you.

Give Us a Call Today!

Whether you are concerned about your primary residence, family cabin or vacation property, or rental property, we are here to assist you in protecting your valuable assets. 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 or schedule an appointment with us by clicking the appointment links on our website so we can discuss your current and future real estate ventures and the best way to protect them for generations to come.