Safe Assets

Safe Assets with a low probability of creating lawsuit liability can be maintained in a single Family Limited Partnership.

Although the family home is a Safe Asset, with liability issues generally covered by insurance, there are a number of tax issues which arise with respect to the transfer of the family home into the Family Limited Partnership. The first problem concerns the availability of the income tax deduction for home mortgage interest. Section 163 of the Internal Revenue Code permits a deduction for “qualified residence interest.” A “qualified residence” is defined as the “principal residence” of the taxpayer. The only requirements appear to be that (1) the house is the principal residence of the taxpayer; (2) interest is paid by the taxpayer; and (3) the taxpayer has a beneficial interest in any entity that holds legal title to the property. Based on the way the plan is structured, you would not necessarily be treated as the beneficial owner of the FLP and the interest deduction is probably not available. Similarly, the $250,000 gain avoidance depends on “ownership” of the residence of for the prescribed period and if the property is owned by the FLP, this tax benefit will not be available.