If you’re in the market for a vacation home, an LLC could be a smart way to own that property.
An LLC, or limited liability company, provides the tax planning and ownership flexibility of a partnership along with the liability protection of a corporation. In most states an LLC can be formed for non-business purposes, including owning a vacation home.
Here are the top three reasons to considering holding your vacation property in an LLC:
Asset and creditor protection: Let’s say a visitor hurts their neck falling down the front steps of a family vacation home and receives a large settlement from a jury as a result. If you hold your vacation home in an LLC, your family exposure to the settlement would be limited to the investment in the LLC–in other words, the vacation home itself. Your primary residence and other assets, as well as those of your co-owners, would be shielded. Of course, you’ll still need adequate liability insurance to supplement the protection offered by the LLC.
Property management: If you own a vacation property with other family members, setting up an LLC will allow you to set some terms. Things like deciding who is allowed to use the home, when each member is authorized to do so, and who will be responsible for making legal decisions are all set out in the LLC operating agreement in writing, which helps to prevent disagreements.
Estate and gift tax planning: If your vacation house is not held in an LLC and it’s located in a state other than the one where you lived, after you pass away the executor of your estate may have to go through a lengthy and expensive probate process. Also, upon death of the LLC owner, heirs will be able to take advantage of a step-up in cost basis to the home’s fair market value, significantly reducing the capital gains due when the home is sold.
LLCs are usually easy to create and require minimal upkeep. Of course, every state has its own requirements for owning a vacation home in this way, so be sure to find out which ones apply to your situation.