Cape Codopoly: Maximizing real estate investments
by Kate BavelockReal estate holdings on the Cape are great investments, despite boom-bust cycles. But there are more decisions to make than simply location, location, location.
Two legal entities you may want to consider:
Real Estate Trusts – Trusts are set up for tax benefit reasons or to keep the names of the trust beneficiaries out of the public record, which only must name the trustee. It also is a tool to gradually transfer property ownership without paying the hefty gift tax that may otherwise be entailed.
It is a unique Massachusetts mechanism that is a “nominee” trust in that the trustees don’t have any real discretion over the property but act under orders from the unnamed beneficiaries.
Real Estate LLCs – A limited liability company incorporated for real estate holdings has several advantages. It is taxed at a lower corporate rate. Most importantly, though, it separates the real estate investment from the rest of the owner’s affairs. That means that creditors or lawsuits cannot come after the personal assets of the LLC’s owners.
“I recently did a LLC for four siblings who rented out their Cape property for two weeks out of the year. It protects them if someone falls on the steps, but it also gives them the ability to easily transfer ownership amongst themselves,” said Matthew Bresette, an attorney with Nutter McClennen & Fish in Hyannis.
Bresette cautions, however, that “It requires true experts in the field to do this, because of IRS regulations and Massachusetts trust laws that demand attention to detail – or the goals you are trying to achieve are ruined.”
Safeguarding personal assets is especially important for high-risk real estate investments.
“Where there might be environmental issues involved is the classic example,” said attorney Stephan Hayes of Hyannis. A redevelopment project may encounter toxins in the soil or the structure for which you do not want to expose your family’s home or assets to liability, for example. Distressed properties are almost always a greater safety risk, although they also can be opportunities for greater profits.
According to Hayes, some investors incorporate each property as an LLC separately to protect each one from a claim brought against the others. But with state fees of $500 a year, it may not be worth it in some circumstances, and one LLC can encompass multiple properties.
Local importance
“Both LLCs and trusts for planning in protection of real estate are more important on the Cape than most places because property values are so high,” said Bresette. It doesn’t take much to get to the $1 million threshold that triggers the state estate tax or $2 million mark that triggers the federal tax.
“I have a client in Cotuit whose property was [valued at] $300,000 only a few years ago; now it’s over $1 million. They don’t want their children to have to sell the property just to pay the taxes,” said Bresette.
For another client, Nutter McClennen & Fish recently set up a Qualified Personal Residence Trust to transfer the home the children grew up in. When the parents give the property to the trust, they get to stay on the property for 10 years, after which they could rent from their children if they need more time there.
“The next generation gets the property at a significantly discounted rate for tax purposes. It effectively reduced the estate tax from $150,000 to zero,” said Bresette. “I can’t emphasize the point enough that it requires someone who works in this area every day, it’s not something you can slap together with a document downloaded from the Internet.”
Originally published in the Sep/Oct 2006 issue of Cape Business.
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