J. Patrick Sutton Cases & Issues Blog

Family vacation home joint ownership headaches

When a family with multiple children has a vacation house, all sorts of title, tax, and administration issues arise. The tool of choice right now is the Family Limited Liability Company, involving the creation of a business entity and a well-written operating agreement.
Vacation home co-ownership, shared ownership, fractional ownership, etc.: when a family has a vacation house, all sorts of title, tax, and administration issues arise.
The title (ownership) issues relate to whose name actually appears on the deed and is therefore capable of bequeathing ownership upon death. The most common scenario is where parents own a vacation home that they wish to pass on to multiple descendants. The first issue to be decided is whether to do this now or whether to do it upon death. The kinds of agreements that we would draft for a client look very different depending on when the transfer is to occur. The second issue is to whom and under what conditions. There are many ways to transfer ownership and many ways of holding title; we would examine all the facts to see what the client is trying to achieve.
The tax issues relate, first, to gain upon any deed transfer as part of the gift or bequest. If we're talking about a vacation home not used as a principle residence, any gain on sale/transfer is taxable as capital gain. The second tax issue is gift & estate taxes: if the home is outright gifted to descendants, careful planning can reduce or eliminate gift and estate taxes.
The administration issues are many and varied. The most significant is how to handle ownership succession issues. What happens in ugly situations is that an ownership share gets inherited by a descendant unhappy with some aspect of the joint ownership (for instance, what weekends the descendant is allowed use of the home). That descendant goes to court to seek partition, and often the only practical solution is a forced sale -- the beloved vacation home is conveyed away from the family. The secondary administration issues are the wide range of considerations relating to multiple parties trying to manage, conserve, and use the same, finite thing.
The choice manner of handling all of these vacation home joint ownership headaches is the creation of a business entity, typically a limited liability company (LLC), to own the property. LLC's, a recent development, are proving particularly flexible and easy to administer in property joint ownership situations. Particularly attractive is the ease of establishing and changing member shares and member contributions. For example, annual tax-free gifting can be easily done over a number of years, with ownership shares and contributions being altered each year to reflect the gifting.
J. Patrick Sutton Cases & Issues Blog