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| SHOULD THE SHARED OR FRACTIONAL VACATION HOME BE HELD IN A LIMITED LIABILITY COMPANY OR LIMITED |
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© March 16, 2007 by D. Andrew Sirkin.
Any reproduction or use of this document or any part of its content
requires the written consent of the author. Mr. Sirkin is chief attorney for Paris Pied-à-Terre Fractional Ownership. Contact Mr. Sirkin at
dasirkin@earthlink.net, or visit www.andysirkin.com
Owning a vacation home as a limited liability company (“LLC”), limited partnership (“LP”), corporation, or other entity (rather than in the names of the co-owners) can offer several advantages, including (i) protecting your other assts from liabilities arising from ownership of the vacation home, (ii) protecting the vacation home from seizure by your creditors (or the creditors of other co-owners), (iii) increasing flexibility for ownership changes, and (iv) adding the structure created by the large body of law that is applicable to these entities (but doesn’t otherwise apply to co-ownership). For properties located outside the United States, owning the shared vacation property as a U.S. LLC or other U.S. entity offers additional advantages which are discussed below.
But owning a vacation home as an entity also has drawbacks. Creating and maintaining the entity structure involves costs that you would not otherwise incur, including formation fees, special taxes, and the annual cost of preparing tax returns for the entity (which is required even if the entity doesn’t owe any tax). In addition, owning the group vacation home as an entity may deprive the co-owners of some of the income tax benefits of vacation home ownership, such as the ability to deduct mortgage interest and property tax as a second home. Ultimately, the question of whether to hold a vacation home as an entity must be answered based on a case by case basis in light of the particular circumstances of your group and your property. The vast majority of groups consisting of U.S. residents co-owning U.S. vacation property opt for direct ownership rather than ownership as an LLC or other entity.
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| Visitor Comments |
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Comment #1 (Posted by R M Theisen
)
"owning the group vacation home as an entity may deprive the co-owners of some of the income tax benefits of vacation home ownership, such as the ability to deduct mortgage interest and property tax as a second home." -- why so, if LLC's are pass-through mechanisms for federal income tax purposes?
The question confuses “pass through” tax treatment with “disregarded entity” tax treatment. Only the latter allows an owner to mortgage interest and property tax of a second home (assuming it is not operated as income property). But “disregarded entity” treatment is not available for all LLCs; rather, it is only available to “single-member” LLCs, those which have only one member of ones which have as their only members a husband and wife who file their income taxes jointly.
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