BiggerPockets

We just bought our first cash-flow investment property out of state. We live in CA. We are interested in setting up an LLC, but have heard conflicting information as to where it should be.

We have been advised to set up an LLC in Nevada due to some specific advantages. (BTW, I would love to discuss this further some other time; perhaps in another forum.) My immediate question is this: Is this possible, or are there specific rules about having to set it up in the state in which you live or in the state in which you are purchasing property (i.e., doing business)?

Any feedback would be appreciated! Thank you in advance.

You can set up the LLC anywhere but it will not do you any good because:

1. If you own a property in a state with tenants, property management and rents from the property, you will be considered to be transacting business in that state. This means that you will either need to set up your entity in that state or register it in that state as a foreign entity, which could add to your costs.

2. Setting up your entity in CA also does not make sense because you will still need to register it as a foreign entity in the state in which you own the property, again adding to your costs.

3. I also feel that an LLC may not be the ideal form of ownership if you wish to shelter your non-CA income from CA taxes unless you elect to have the tax treatment as a corporation and not as a partneship. In fact, I would very much prefer a C Corp for what you are proposing.

I do know of people who have owned vacant property in AZ through a non-AZ corporation, but those were vacant properties with no activity that could be construed to be doing business in AZ.

In short, the best approach may be to set up your entity in the state in which you own the property. If you plan to own properties in many states, you may wish to consider a holding company in a tax-free state with that holding company having a subsidiary in each state in which you wish to own properties.

But please consult with your tax advisor and do not take any major decisions based on my opinion or that of anyone else on ant forum.

Wow. All very good and thorough advice. Thanks all.

I am going to have to digest this is a bit. It sounds like there are multiple layers to consider -- asset protection, costs, taxes, etc.

Eddie, out of curiosity, how did the WY/TX pairing get matched as such, whereas AL/AL are together?

You should consult with an attorney to figure out entity structuring if you have significant assets. I really have to disagree with Bill's opinion. If you have worked hard to accumulate your wealth, the last thing you want is to fritter it away based on what someone says in an online forum.

Find a good corporate attorney, have a consultation with him and you should be able to figure out how you wish to proceed. If you are just starting out and do not have much assets, then Bill's advice is reasonable. But certainly not for wealthy people.

In any event, your original question was about where to set up your entity and I believe that has been answered.

Hi, good info Charles. Well if your family assets are in 8 digits on the bottom line you should already have at least one trust....I've got 2, a non-profit and in 6 LLCs. About to be 7 at closing this next week on an office/wharehouse in Ft. Worth. I could probably shoot a tenant accidently and they wouldn't get past 5 million in liability coverage....to each his own. As VIkram suggested, get professional assistance, you want to do it right the first time.

As Eddie mentioned, I ran barefoot for many years in real estate and never had a problem. As I just mentioned in another thread, a good insurance agent/broker can help you assess your risks as to what type of real estate investing you plan on doing. You may have more risks arising from other aspects of your life than in real estate. The best thing to do, IMO, iis to firts assess your risks, insure appropriately and palce assets in those entities that achieve your overall plan. Maybe you should be looking at a couple of trusts instead of just an LLC. The best way to get really good advice for your situation is to ask your professional advosry team, an accountant, an attorney and your insurance advisor.

Charles, how do state taxes work for a C Corp that is incoporated and owns property out of state? For example, a CA resident owns shares in a C Corp in NV which owns property in NV? Assuming all property management is done from NV, and considering that the C Corp is not a pass-through entity, the CA resident should be able to accumulate profits in NV without paying CA taxes, right?

Bill, insurance is essential but is not quite the same as good structuring. You can get landlord's insurance for things that happen at your property, for example. But what if you are at fault in a car accident and the liability exceeds your car insurance? Or what if you are at fault in an uninsurable / uninsured activity? Proper structuring can help in those situations because it is not event-specific. The goal behind asset protection planning is to protect your asset regardless of the cause whereas insurance covers you for specific things.

Finally, the idea that you have not been sued so far and therefore your structure is good is flawed. Any risky activity will have some survivors and some victims. The idea is to do things such that the probability of being a victim is reduced signficantly. Being lucky is not the same as having a good plan.

The C-corp is a separate entity. So C-corp will be taxed based strictly on its income sources. If the corp was formed in NV and does business exclusively in NV, the only tax the C-corp would pay would be NV state taxes and any federal taxes that apply. The only complication might be where the employees of the corporation work and if they have a physical office in the state and what they do for the business. In some states a home office doesn't count. In some states it does.

Anyone paid by the NV corp would have NV sourced income to include as W-2, 1099 or dividend income. As a CA resident that income would be apportioned based on NV and CA rules and one of the considerations would be if there was active or passive participation in the corporation. If the employee works in CA there might be a portion that could be considered CA income. You would want to discuss this with a CPA familiar with the state appropriation rules and the current case law concerning Nexus.

Thanks for the advice.

Asset protection is definitely a priority (among some others). Unfortunately, we live in a litigious area; I have heard threats of lawsuits tossed about too easily in these parts and sometimes to the most well-meaning of people.

I will take all of your advice and begin looking into it with an advisor. I learned a lot here.