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House Title– How to Hold for Better Protection

House TitleHow you hold the title to your house to protect it from lawsuits makes a difference. I often have asset protection fanatics tell me that they have put their house title in a corporation or Limited Liability Company (LLC) for house protection. This is a big mistake. Not only are they are losing valuable tax benefits. They have confused the purpose of asset protection using a company, whether it’s a corporation or LLC.

Company structures are intended to protect the shareholders (investors) and the managers from personal liability. When something goes wrong in the company, they are protected. Congress didn’t pass the laws associated with companies for personal asset protection. The object of these laws is to encourage people to take the risks associated with running and financing a business. The company only protects against acts done in the pursuit of the business’ activities. How often does your house commit an act that you need to be protected from?

Let’s face it: owning a home isn’t a business activity. It is a personal activity. Your home isn’t “doing business.” This means activities associated with home ownership won’t be activities that a corporate structure will protect against. What corporations protect and don’t protect against is a hard concept to understand. What you need to know is that a business structure isn’t for house protection. Holding a house title in a company won’t protect you against activities or problems that occur at the house. You can still be sued for those activities.

More importantly, holding a house title in a business entity for home protection is a tax disaster. It isn’t a personal residence any more. Instead it is real estate owned by your company and you live in it. If you don’t pay rent, the IRS will attribute rent as additional income and you will be charged tax.

There are other tax issues with holding a house title in a business entity for home protection. Since it isn’t your personal residence, you will not be able to take advantage of the income tax deduction for interest paid on a residence. There also will not be any step up in basis in the value of your home when you die. Your heirs will have to pay taxes on the full amount of the value of your house. You can’t qualify for the tax deduction that comes when you live in a personal residence for two out of five years. You lose this benefit and must pay full bore taxes on the gain.

By the way, it is OK to hold your house title in a living revocable trust (not a land trust). By Federal law if a “grantor trust” is used, which a living revocable trust is, then there are no tax consequences. Therefore, when you transfer your house title into the trust, you still own the house in the eyes of the government. The trust is simply transparent to the IRS for income tax purposes. This means that you will still qualify for all of the home tax benefits.

Perhaps the best way to get house protection for a personal residence is to carry insurance. A large liability policy with a good umbrella provision will protect you and your house from accidents in your home and lawsuits, etc. Another way to get some house protection is to move the house title into the name of the spouse with the least liability. How you own property for house protection is critically important. My book, Protecting Your Financial Future, deals in detail with home ownership in the context of trusts so you can get the proper house protection.

4 Comments
  1. Hi Lee,

    I discovered you on YouTube, and am learning a lot from your videos. One issue that I haven’t seen raised or answered anywhere, and still puzzles me though…

    The house deed was recorded with the owner as “zzz Family Revocable Trust”, my parents have passed, and the house is remaining in the trust, so my brother can live in it. He will now receive discretionary lifetime income from the trust as an improvident beneficiary, rather than a lump sum.

    The trust is now irrevocable, so does the deed need to be changed at the county again to remove the word “Revocable”? And if I do, won’t there now be property tax consequences and hazard insurance issues?

  2. Dan,
    The name of the trust still has the word revocable in it. you can put any word in the name of the trust, and it is just an identifier of the trust. The terms of the trust don’t have anything to do with the title. You are correct, the trust terms say it is now irrevocable, but the name of the trust hasn’t changed. The trust by that name still owns the land. It is still used as a residence by the family. Death in most cases doesn’t change the nature of property, like transferring it into a corporation or LLC would. You should be fine leaving the property and insurance as is. The rules in lots of places cut you some slack if you are willing to die to move property.

  3. Hi Lee,
    I inherited my Mother’s house in 2012. I am in CA so it was not reassessed because of Prop 13. Now I am gettting ready to sell and I am finding out about this Step Up Basis. I am wondering how to get the Fair Market Value from 2012 for the house to eliminate some Property Gains Tax. I can see on Zillow history it was $534,000.00 Do I need some sort of official document?

    Thank you,
    Linda

  4. Linda,
    You would need some evidence of comparable houses that sold at the time of her death in 2012 – if your taxes are ever audited. You will have to pay capital gains on the price increase between 2012 and now assuming the price of the house has gone up since 2012. I am sure real estate agents have the listings that would be comparable in 2012.

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