Nevada, unlike almost all other states, allows limited liability companies (LLC’s), to be established for non-business purposes. Specifically, a Nevada LLC can be used for any lawful purpose and can be used to provide asset protection and as a means for managing and controlling not only vacation home properties, but also many other forms of personal use property. For example, a Nevada LLC can be used by individuals and by families where the LLC’s property is not used for business purposes (rental or other commercial purposes) but is used instead as a vacation home or for some other non-business use.
Moreover, the extreme flexibility of the LLC form permits a family to use an LLC to hold a vacation home as a means for establishing a systematic method for managing and controlling vacation homes, restricting transferability of ownership interest, preventing and resolving disputes among family members and for providing estate planning and gifting options that would not otherwise be available to a vacation home that is held individually or by multiple family members in a tenancy in common or other ownership method.
Vacation homes may also take many forms. They may be a mountain escape in Lake Tahoe or a beach destination on the California Coast. They may also be a luxurious motorhome, a houseboat, or a yacht.
In most instances, the traditional forms of joint ownership among family members, namely tenancy in common and joint tenancy with the right of survivorship, do not work well with family vacation homes. The problem with those types of ownership is that the ownership interest often becomes fractionalized and difficult to pass down multiple generations of family members.
Using an LLC to own the vacation home solves many of these problems. For tax purposes, the expenses of ownership,–mortgage payments, property taxes and maintenance–can be allocated among members in accordance with usage or some other purposes. To that extent, the costs can be also allocated for tax purposes on the basis of who paid the expenditure. Additionally, use of the LLC charge and owner protection means the vacation home can be asset protected against claims of creditors of any individual family members. That would not be the case with a tenancy in common in that a creditor could potentially force the partition of the property in order to pay for an outstanding liability of a family member.
In summary, there are five specific reasons why an LLC is preferable to other forms of ownership of a vacation home.
· An LLC can limit the owners’ exposure to lawsuits by vacation home users and creditors (asset protection).
· An LLC can impose transfer restrictions and prevent owners from forcing the sale of an interest in the vacation home, thereby making it easier to keep the vacation home in the family.
· Because the LLC is an entity, it can hold operating funds and effectively report the sharing of income and the allocation of expenses among vacation homeowners in accordance with usage.
· An LLC has perpetual existence. The Operating Agreement for the LLC can establish rules for expense sharing, scheduling, dispute resolution and buy-sell provisions in the event that one of the owners wants to sell his interest.
· In Nevada, an LLC provides charging order protection (asset protection) for single member LLC’s. Thus, in the event that one family member buys out all the other family members, he or she will still continue to realize the asset protection of keeping the vacation home in an LLC form.