Can an LLC Own Vacation Property?

By Tom Speranza, J.D.

Can an LLC Own Vacation Property?

By Tom Speranza, J.D.

If you're thinking of buying a vacation property or already own one, you can form a limited liability company (LLC) for the sole purpose of overseeing the property. You can form this type of business entity in any of the 50 states. State laws grant broad powers to LLCs to take any lawful action or enter into any transaction that a business or enterprise may need or desire. In most states, this includes borrowing money, hiring employees, signing contracts, and owning commercial or residential real estate.

Two white lawn chairs overlooking the beach

Advantages of an LLC

LLCs have some legal and operational advantages that can make them an ideal vehicle for owning a vacation property:

Liability Protection

As stated in their name, they offer limit liability for owners (also known as members). In other words, if there is a contractual obligation or legal issue, the party to the contract or legal claimant has recourse only to the company assets (property, bank accounts, etc.). The members' personal assets, such as their houses and cars, are not at risk.

Flexibility

LLC owners can customize ownership and management rights to fit their particular situation to a greater extent than a corporation. For example, some members may have a purely financial interest in the company (they invest money and are entitled to some return) while other members may have management rights (they manage the property, sign contracts and leases, determine when to sell or refinance the property, etc.). Those financial and management rights can also be blended so that different members have different combinations of rights.

Fewer Governance Requirements and Paperwork

An operating agreement governs an LLC. It can combine member and management roles in a single individual, streamline decision-making and the formalities involved, and impose conditions on the transfer of membership interests. To cite one example, these types of business structures are not required to issue certificates that document membership interests.

Pass-Through Taxation

Most LLCs are set up as partnerships for tax purposes. They allocate profits and losses to the members who then report such amounts on their individual tax returns. The business does not pay tax separately as an entity. Corporations have limitations on their ability to choose partnership taxation.

Reasons to Own a Vacation Property Through an LLC

Owning a vacation property through an LLC is a good idea in certain circumstances. Here are a few examples:

  • The property is an investment that you own with others—the business can make it easier to divide ownership and management responsibilities among multiple people.
  • The property is rented to tenants—Forming your business to oversee vacation property can shield the owners from potential liability from injuries that may occur on the property or legal claims relating to the property.
  • Multiple siblings or other family members inherited the property (for example, following the death of a parent). An LLC can simplify the process for distributing ownership interests and dividing up the financial obligations for the property (taxes, maintenance costs, etc.).

Issues to Consider

Before taking the next step, you should consider the following issues:

  • Most banks will not lend money to an business unless it has a long operating history with positive cash flow. A new LLC with one vacation property will not qualify for a mortgage unless the members personally guarantee payment of the debt.
  • If a vacation property is already owned by individuals who want to move it into a new business, the transaction may trigger state and local real estate transfer tax.
  • You and your coinvestors need to discuss the tricky issues of what happens if a member dies or wishes to sell their ownership interest. To prevent unwanted partners in the property, the business may need to purchase life insurance on the owners or structure another succession plan.

A business or real estate lawyer with experience advising clients about investment properties can be a valuable resource if want to form an LLC to own a vacation property.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.