Asset Protection for Your Residence

November 11th, 2014 at 5:31 PM

For most people their home is one of their most valuable assets. It can truly be one’s castle, but is also one of the most vulnerable assets to creditors. The goal is to protect this asset at all costs. However, as I will explain, there are significant hurdles to accomplish protecting the complete value of your home.

Under Internal revenue Code Section 121,  there are guidelines and rules regarding the ownership, and the tax benefits. One being the $500,000 exemption on the sale of your personal residence, if you are married, $250K, if single. This is critical to understand from a tax structuring point of view. Many people believe that if they place their residence in an Limited Liability Company (LLC), they have created asset protection. However, they have forfeited the $500K exemption in the sale of the residence!

Secondly, the value of one’s home is constantly changing–hopefully, increasing in value. Therefore, any strategy must be updated regularly.

Next, most people have been conditioned to believe that it is wise to pay down your mortgage (pay-off your home), thus, increasing the equity. A creditor will view this nest egg as the “golden egg” in their effort to collect a payment from you. Please understand that I am inferring that it is unwise to pay-off your home, just to realize that the equity is exposed without proper planning.

Here are some useful asset protection strategies to employ”

1. Homestead Exemption–This is a statutory exemption available in most states to protect a certain amount of equity from a creditor or bankruptcy. Please be advised that the laws vary from State to State on how much protection is allowed, and how to avail oneself of this.
2. Tenants by the Entirety–If your State allows titling the property as such, the property is protected, if one spouse is subject to a lawsuit.
3. Equity Stripping–This strategy involves place a lien on the equity of the property by various ways.
4. Holding Company–This strategy involves placing the property in an LLC or Limited Partnership. This strategy is to be utilized with careful planning due to the negative tax consequences alluded to previously. This may be suitable for people who are not planning to sell the home, but passing it on to the family–who will receive a “stepped-up-basis upon death.

These are few examples, as there are more complex strategies that one could also consider.

As Certified Asset Protection Planner (CAPP), I an certainly make recommendations on this critical subject.

Mark S. Fineberg CPA