When should someone title their home to a protective entity, such as a limited partnership or limited liability company?
Both the limited liability company and limited partnership similarly protect assets, however, we wouldn't normally title a client's home to a family limited partnership or multi-member limited liability company for their charging order protection. Asset protection planners occasionally do recommend titling the family residence to a limited partnership, but the downside is that you lose your homeowner tax benefits. However, you can maintain your home ownership tax benefits if you title your home to a single-member limited liability company, which is considered a disregarded entity for tax purposes. These tax benefits can be considerable.
For example, a single person has $250,000 capital gains tax exclusion on the profits when they sell their home. A married couple has a $500,000 exclusion. To claim this exclusion: 1) one or both spouses must have owned the home for at least two out of the five years preceding the sale; and, 2) the house must be the primary residence during those years. If a family limited partnership owns the house for more than three of those five years, the owners lose their tax benefit. They can, however, transfer their home to a family limited partnership for no more than three years and then retransfer the home back to their name for at least two years; however, this arrangement is usually impractical and burdensome.
It's sometimes smart to have a single-member limited liability company own the home. If you're married, one spouse (usually the less liability-prone spouse) can be that single-member, though this is not always the preferred strategy. The IRS disregards single-member limited liability companies for tax purposes, so the home, for capital gains purposes, should be considered as if the home were owned by the individual member. You cannot achieve this tax strategy with a limited partnership which requires at least two owners and therefore cannot be a disregarded entity. We urge our readers to review this strategy carefully with their tax advisor. But remember: if you title your home to a single-member LLC, you may lose your homestead protection.
The single-member LLC is protective to the extent that it will shield the home from adverse judgments filed against the debtor as the prior owner. On the other hand, courts have sometimes set aside singe-member LLCs, and the single-member may then possibly be successfully creditor challenged.