Whether you are looking to own a vacation home for a couple of years or to keep it in the family for generations, the planning you do now can help you avoid challenges down the road. In this four-part series, we’ll discuss ownership structures, long-term estate planning, tax benefits, and tips to avoid disputes.

Part 1 - Property Ownership Structure

Start by considering your goals. Are you looking for a place to create lasting memories for yourself and future generations? Do you want a getaway spot for the next few years, or is your primary focus on investment potential? Clarifying your objectives will help guide key decisions, such as selecting the right ownership structure to ensure legal protection, maximize tax benefits, and support long-term estate planning. Below, we discuss the advantages and disadvantages of common ownership structures.

1. Sole Ownership

In a Sole Ownership structure, one individual holds title to and has complete control over the property. While the simplest form, it has additional financial and liability risks.

Pros:

• Easy to implement and minimal ongoing administrative fees.
• Simplifies decision-making and allows for full control over use and management.
• Provides the owner the autonomy to sell or transfer the property without the consensus of co-owners or partners.

Cons:

• The owner has full responsibility for any financial obligations, including mortgage payments, property taxes, and maintenance costs.
• The owner bears the risk of liability associated with property ownership, such as accidents occurring on the premises (although this can be mitigated by purchasing liability insurance).
• The owner must address the transfer of property upon death to ensure that the property is passed on according to the owner’s wishes. This can be more complicated if the vacation property is in a different state than your primary residence.
• The sole owner bears all of the investment risk of fluctuations in property values.

2. Joint Ownership

In a Joint Ownership structure, multiple individuals or family members co-own the property, either as joint tenants or tenants in common. One of the biggest draw backs to joint ownership is the potential for disagreements and disputes over using and managing the property, but we’ll get into more of that when we write on tips to avoid disputes.

• Joint Tenancy: If the property is owned by joint tenants with a right of survivorship, ownership passes directly to the surviving owners upon the death of one of the joint tenants. This kind of tenancy is most common for married couples, but may be applicable to others.
• Tenants in Common: Upon the death of an owner, their share passes to their heirs or devisees under their will. This kind of tenancy is most common for unrelated owners or perhaps close relations, such as siblings, but may also be used by married couples for estate planning purposes.

Pros:

• Shared financial burden and risks.
• In joint tenancy with right of survivorship, the property passes directly to the surviving owner(s) by operation of law without going through probate.

Cons:

• Disagreements over usage, maintenance, or selling the property can cause conflicts.
• In a tenancy in common arrangement, each owner may sell or devise their share independently, leading to co-ownership with strangers.
• May require a written agreement among the co-owners to allocate responsibilities and address transfers of ownership shares.

3. Trusts

Placing your vacation home in a trust allows for controlled management and clear succession planning. A trust, which can be revocable or irrevocable, offers many benefits for keeping vacation homes in the family for future generations. We’ll talk more about this when we write on estate planning strategies.

Pros:

• Placing the property in a trust set up during your life may avoid probate.
• May provide some level of privacy to the beneficial owners.
• Offers flexibility.
• Presents estate and tax planning benefits.
• May minimize family disputes.

Cons:

• Involves initial set up and ongoing administrative expenses.
• Requires careful management to comply with legal requirements, and careful planning to align with estate planning goals.
• Obtaining mortgage financing for trusts can be difficult.

4. Limited Liability Company (LLC)

Owning property through an LLC means the company, not the individual(s), hold title to the property. This structure is frequently used for vacation rental properties and when owning property with others, as an alternative form of co-ownership. An LLC is governed by an operating agreement among the LLC’s members outlining the internal operations and management structure of the company and defining the rights, responsibilities, and liabilities of its members.

Pros:

• Provides limited liability protection, by potentially shielding other assets from liability associated with the property.
• Offers flexible management arrangements.
• Potential tax benefits. We’ll talk more about tax considerations in maximizing tax benefits.
• Flexibility in transferring ownership shares.
• May provide privacy for the LLC members.

Cons:

• Ongoing reporting and compliance requirements, including annual state filings and tax filings.
• Complex bookkeeping, operating and accounting requirements can be time consuming and an added administrative cost.
• Obtaining mortgage financing for LLCs can be difficult.
• Annual filing fees.
• Requires careful management to comply with legal requirements, and careful planning to align with estate planning goals.

One size does not fit all. Whether you choose a sole or co-ownership arrangement, a trust, or an LLC, each structure presents unique advantages and challenges that can significantly impact your liability, tax implications, and operational flexibility. If you’re still uncertain about which path to take, our team is here to help you make informed decisions and set you on the path to real estate success.

In the next issue, we will discuss estate planning strategies for owing a vacation home.