How 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.