Real estate encompasses not only one’s primary residence but also other properties such as vacation homes and rental properties.

The ideal form of ownership varies depending on the type of real estate you own. Below, we examine the different types of real estate and provide advice on the best form of ownership for each.

Primary Residence

Given the special tax treatment afforded to primary residences, it is crucial to carefully consider the ownership structure of your home. In certain states, including Virginia, tenancy by the entirety offers married couples creditor protection from the creditors of one spouse (with a possible exception for federal tax liens) while preserving relevant tax benefits. This form of ownership also allows for the 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 reside in a state that permits the tenancy by the entirety protection to transfer to the joint revocable trust. Ownership by the trust ensures that the real estate will not undergo the lengthy, expensive, and public probate process but will instead be managed according to your wishes as specified in the trust document.

For single individuals, 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 enable you to retain the applicable tax benefits while avoiding the probate process. If asset protection is a significant concern during your lifetime, certain types of irrevocable trusts may be best suited for your needs, although they may require you to relinquish some control of the property.

Vacation Home

For many families, a vacation home holds 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 as it addresses two main priorities: ease of transfer to the next generation and asset protection.

With a trust or LLC, you can establish rules for how the property is to be used and maintained, as well as designate what is to happen to the vacation home upon your passing. This can be an effective solution if you wish to ensure that the vacation home remains 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 seek relief from your personal accounts or property or those of other members. Additionally, if a judgment is entered against you or another member for a claim unrelated to the LLC, it will be more challenging for a creditor to force the sale of the vacation home. This can be incredibly beneficial if you wish to pass the vacation home on to the next generation without worrying about the individual financial situation of each new member.

Note: In some states, 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 behind these laws is that your creditors should be able to seek relief through your LLC interests to satisfy their claims, as there are no other members who would be negatively impacted by the 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 ensure that transferring your vacation home to a trust or LLC will not result in an increase in your property taxes or other unintended consequences.

Rental Property

As rental property generates income rather than serving as a residence, asset protection is typically the primary concern. As a landlord and owner of rental property, you face a higher probability of lawsuits arising in connection with the property due to the changing occupants over time. Transferring ownership of the rental property to an LLC is a prudent option. If a renter is 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 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.

Furthermore, ownership by the LLC may protect the rental property from your personal creditors. However, if you are forming a single-member LLC, it is essential to verify state law to ensure that creditor protection is available.

Contact Davis Law Group Today

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 various considerations for selecting a form of ownership, it is important to have the right advisors guiding you. The experienced real estate and business attorneys at Davis Law Group can discuss your current and future real estate ventures and the best way to protect them for generations to come so you can have peace of mind. Contact us today.