Business Management

Should You Get an LLC For Your Real Estate Business?

Expertise: Landlording & Rental Properties, Personal Development, Real Estate News & Commentary, Real Estate Investing Basics, Business Management, Flipping Houses, Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Real Estate Wholesaling, Personal Finance, Real Estate Marketing, AskBP
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Perhaps the most common question I receive from BiggerPockets members is, “Should I set up an LLC for my real estate business?

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It’s a good question because I’m sure you’ve heard the horror stories of landlords getting sued by tenants and losing everything. You didn’t spend years learning about real estate, growing your portfolio, and figuring out how to be an effective landlord only to lose it all to some deadbeat looking to game the legal system.

However, LLCs are also highly misunderstood in the real estate space because they are just so darn complicated. What works for one person may not work for you, and what works for you might not work for me. While I could give you the simple answer of “talk to an attorney,” I want to dive a little deeper.

Of course, I am neither an attorney nor a CPA, so please take what I’m saying as my own personal opinion and get a qualified person to help you out with these legal discussions.

What is an LLC?

First, let’s talk about what an LLC is and what it isn’t. An LLC is NOT a get-out-of-jail-free card. You can be sued with an LLC, and you can lose everything. An LLC is not designed to prevent you from ever being sued. An LLC is designed to help you manage and contain the fallout from that lawsuit.

Related: #AskBP 013: Should I Have Several LLCS For My Real Estate Business?

According to the United States Small Business Administration (SBA), a limited liability company is “a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.” According to this definition, an LLC’s benefits are three-fold:

  1. Limited Liability: IF you were to get sued, your liability (the damage to your wallet) can be contained to the assets within the LLC, not everything else you own. In other words, if the LLC is set up right and you get sued (and lose), the creditors probably won’t be able to take your personal house or your car, or garnish your W-2 job wages. Or course, there are ways a judge might “pierce” the protection of an LLC and go after these things IF every “i” was not dotted and every “t” not crossed.
  2. Tax Efficient: The LLC is fairly easy to handle during tax time, especially if it is a “single-member LLC,” which means an LLC owned by just you or you and your spouse. LLCs are known as “pass through entities,” which means the income and expenses flow magically through the LLC and are reported (and paid) by each individual member on their personal income statement. There is no “corporate tax” like a corporation might pay. This can definitely make taxes easier and less expensive than, let’s say, a corporation. That said, while a “single-member LLC” does not require its own business tax return, a multi-member LLC does. Don’t make this mistake.
  3. Operationally Flexible: Finally, an LLC is fairly flexible in terms of running it. You don’t need thousands of documents, and there is no need to issue stock. An LLC can be set up fairly easily and inexpensively and requires just a few documents.

It’s easy to see why an LLC might be advantageous to a real estate investor. Let’s say a tenant slipped on the stairs and broke their hip. The tenant decides to sue the landlord for “neglect” and the court sides with the tenant. For whatever reason, let’s say your insurance doesn’t cover all of the legal penalties and you as the owner are required to pay $500,000 out of pocket to the tenant.

Ouch.

If you own the property without an LLC, the tenant could have your wages garnished, force you to sell all your properties, and drive you to bankruptcy. You’ll probably end up eating cold beans out of a can under a bridge while pigeons sit on your shoulder.

It’s not a fun place to be.

On the other hand, if the owner of that property was “Main Street Investments LLC,” then the LLC is the owner getting sued. The courts could make you sell that property, but they likely won’t be able to make you sell other properties owned by other LLCs. They won’t take your primary residence. You won’t be eating cold beans.

Of course, this example is a bit over-dramatized and unlikely to happen. And I don’t actually mind eating cold beans. But it illustrates the fear that drives most investors to want an LLC. However, even though it sounds like I might be encouraging you to go get an LLC, hold your horses. There are some other important factors to consider:

The Problems with an LLC and Real Estate

LLCs are great, I won’t deny. However, they might not be great for you. There are some fairly important considerations to make before you jump onto the LLC bandwagon that could affect your decisions.

Lending on an LLC is Almost Impossible

That's right, if you plan on using a loan to acquire an investment property, it's unlikely you'll be able to have an LLC own the property. Most residential lenders simply will not lend on a property that is inside of an LLC, forcing you to turn to a commercial lender that has higher fees, higher rates, and shorter terms… something you probably don't want to do.

Now, many investors simply transfer the ownership of the property into an LLC after purchasing the property in their primary name, but that presents some big risks as well. If the bank finds out (and they probably will due to insurance stuff), they might call your note “due” because of the “due on sale” clause.

Of course, you didn’t sell the property, but you did transfer the title from one entity (your name) to another (your LLC). In the past, this has never really been a problem, as banks have generally turned a blind eye.

However, this seems to be changing lately and is expected to only get worse as interest rates begin to rise. If you plan to go this route, I would recommend speaking with your bank and getting permission in writing to transfer the properties into an LLC.

This is the only way you’ll be truly protected from that dreaded “due on sale” clause.

What Are You Protecting?

New investors automatically think they need an LLC to protect themselves, but when you are first starting out, how much wealth do you really need to protect? Think about it. You have a property or two with very little equity. You have car payments.

You don’t have six figures in the bank, yet you want to go through all this trouble to protect your “wealth?”

Additional Paperwork and Hassle Furthermore

While LLCs are definitely easier than corporations when it comes to paperwork and taxes, they still add a lot of complications to the mix. This is especially true if that LLC contains multiple members who are not married, as an individual business tax return will be required. Setting up the LLC takes money, maintaining it takes money, and filing taxes takes money… on a property that you probably are not making much on in the first place. Imagine spending $2,000 per year on asset protection on a house that only cash flows $1,200 per year. Yes, an LLC can turn a good investment into a bad one.

The Truth About New Investors and LLCs

Here’s the thing I’ve noticed: people like to set up LLCs because it makes them feel like they are taking action.

They aren’t.

In fact, the idea of an LLC is probably the number one excuse people have for NOT taking action.

I see it almost every day on BiggerPockets. “I want to invest in real estate, but I don’t know what to do about an LLC.” How absurd! The truth is: people use the concept of an LLC as an excuse so they don’t have to get out there and take action.

It’s easier to say, “I don’t have an LLC yet, so I can’t buy a property” than it is to say, “I’m scared.”

But this is often the truth.

Yes, LLCs are valuable.

Yes, I have them.

Yes, I recommend talking with someone about setting one up, sometime.

However, LLCs are no substitution for taking action. If you don’t have any wealth to protect, maybe you don’t need an LLC. When you find yourself building wealth and creating a sizable business, that’s when an LLC will come in most handy for you. By that time, you’ll be able to afford the proper attorneys and CPAs who can handle setting the LLC up right.

Related: Is Filing Your Real Estate Business As An LLC Your Best Option?

And maybe at that time they’ll tell you that you really don’t need an LLC. Maybe they’ll set you up with something different. You won’t know unless you ask.

What Should You Use Instead of an LLC?

Let’s look back at the three benefits of an LLC:

  1. Limited Liability
  2. Tax Efficient
  3. Operationally Flexible

What other legal structure can help you protect yourself from losing personal money if you get sued and is easy to manage and pay taxes?

I’ll suggest two things: insurance and leverage. Let’s talk about both, briefly.

1. Insurance

That's right, good insurance can help you avoid eating beans under a bridge. Get the right insurance, and get enough of it. Talk to a good insurance agent about your options and let them know your fears. They'll be more than happy to sell you the best policy possible.

2. Leverage

When someone is going to sue you, what is their goal?

To get as much money from you as possible, of course. This is why leverage can actually be a large help in protecting your assets.

By “leverage,” I mean the low down payment you use on your purchase. For example, if you owe $100,000 on a property and the property was worth $110,000… you are highly leveraged.

People often look at this like it’s a bad thing, but in asset protection, it’s a huge benefit.

What kind of lawyer is going to go after someone, spend hundreds of hours litigating, and force them to sell their rental — only to find there is NO blood to be squeezed from that turnip?

On the other hand, if you own a rental property free and clear and it’s worth $110,000, suddenly the idea of suing you becomes much more exciting for an attorney because they know there is a ton of money for them to take.

I’m not saying you should go increase the leverage on every property you own. But what I am saying is: when you are first starting out, you’ll likely be very highly leveraged, thus not a big target for lawyers to come after.

So, Should You Get an LLC?

Finally, I need to end this section with the dreaded answer everyone hates: I don’t know. Talk to an attorney and CPA.

Only they’ll be able to truly help you know if you are ready for an LLC. An LLC is a powerful legal entity, but only if it’s set up correctly and actually beneficial to you.

And there is no easy way for me to tell you if that’s the case in your life.

However, I would encourage you NOT to let the LLC question stop you from moving forward with your real estate ambitions.

Don’t let it be an excuse, and don’t let the fear of a lawsuit stop you from achieving your dreams.

Investors: Have you set up an LLC for your real estate business? What has your experience been?

Leave your comments below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, with nearly 100 rental units and dozens of rehabs under his belt, he continues to invest in real estate while also showing others the power, and impact, of financial freedom. His writings have been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media. He is the author of The Book on Investing in Real Estate with No (and Low) Money Down, The Book on Rental Property Investing, and co-author of The Book on Managing Rental Properties, which he wrote alongside his wife, Heather, and How to Invest in Real Estate, which he wrote alongside Joshua Dorkin. A life-long adventurer, Brandon (along with Heather and daughter Rosie) splits his time between his home in Washington State and various destinations around the globe.

    Nil K
    Replied about 6 years ago
    Good one !!!! I am at the beginning stage of all this and comparing everything and I am inclining towards not having LLC’s even though I live in Florida and the cost is not as high as yours…
    Jp
    Replied about 2 years ago
    One thing no one has mentioned and for me it’s a big one.What happens if your spouse dies and the state your properties are in have an estate tax? This is the reason I want to pursue an LLC for my rental properties and locate it in my home state of Washington. Anyone have information on this?
    Ali
    Replied about 6 years ago
    Cool Nil! Again, totally dependent on your situation, but a lot of people don’t really need them when they think they do. Glad I helped.
    Andre Watson
    Replied 8 months ago
    likewise, I am going to start virtual wholesaling, but I wanted to know if it was going to be necessary to get a LLC
    Kyle Hipp
    Replied about 6 years ago
    I think you gave a good analysis but just to clarify. You and your properties are not just as secure as a properly structured rental ( or group of rentals) in an LLC. In a properly structured LLC, worst case scenario your LLC is forced into insolvancy and your properties owned in that LLC are lost. In you scenario in the worst case you could still lose everything personally in the worst case scenario as it is not a separate identify and is directly tied to you. As you stated in both cases this is unlikely with proper management but there definately is a difference in your protection.
    Ali
    Replied about 6 years ago
    Good point Kyle. I forgot to bring up the difference in what is at risk should something go haywire- your personal assets versus just the asset(s) in the LLC. Thanks for mentioning that! Very important in considering your best option.
    Terry P
    Replied about 6 years ago
    Not really, it depends, if you are a single member LLC with assets in an LLC it is easier to pierce the veil with charging orders granted by judgment, and in some states to foreclose on a member’s interest. With that ability you can manage distributions to pay a debt. I see an LLC as more protection than a SP holding assets, but not in all cases. If your LLC is insolvent you’re probably are in a CH 11 bankruptcy and assets you have in personal accounts can also be attached after the LLC is liquidated. For example, bank loans, or, if you slip and fall because you were found to be unknowingly at fault they cannot get to assets in the LLC they will go after you personally. It is more difficult and hyper complex to “manage an LLC properly”, your risk are higher at not knowing all the laws that link to LLCs vs SP, and many laws are still being written or challenged in many states based on case law, still a lot to define, LLC and RE law, contract law, etc. There is a lot of grey are in holding rentals in a LLC vs SP that has been done by many for centuries. LLCs are in sort a new fad, yes a way for ppl to look cool, a scare tactic….most don’t do their homework or simple can’t due to hyper complexity. An improperly managed LLC or SP stands no chance, and it is a myth that umbrella polies, liability, WC will defend violations of the policy holder(s) to the specific policy exclusions, state, fed laws, and case laws. Where I see REI’s benefiting from LLCs is first multimember, and in the case where they are managing subs in which case most REIs are basically managing a construction company and are not doing it properly acting as a GC, PM, employers, etc. The exposure to liability and WC goes up, if managed properly (whatever that may mean legally), and insured properly the risk goes down. I look at assets to include legal fees having to defend a law suits and a personal ability to make income for the rest of their lives, not just real property. Here is my favorite answer, there is none by Mr Reed: http://www.johntreed.com/entity.html
    Ali
    Replied about 6 years ago
    Whew, Terry, those are big words and sentences. I have a feeling you know exactly what you’re talking about and it is great advice! 🙂
    Brian Jones-Chance from Ypsilanti, Michigan
    Replied over 4 years ago
    In my opinion, it is prudent to always hold investment properties in Nevada or Wyoming LLCs where there is charging order protection. The worst case scenario typically is the forfeiture of distributions. Because of this, attorneys don’t usually pursue suits with these types of entities. If you never make a distribution, they will never be paid.
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    Brian, you only have half the equation solved by going to Nevada. If you have an LLC doing business in another state they will require you to file as a Foreign Entity. The assets within that entity are exposed from within. You will also be required to acquire the services of a register agent if you don’t have a permanent address in that state with regular business hours. The Nevada advantage is multiple Entities held by one over arching entity. The idea is to protect on entity from another. Or so the story goes. The rental or investment property you own outside of Nevada in a Nevada LLC is bound by the rules and laws of that state.
    Jeffrey Hare
    Replied about 6 years ago
    Ali, I think a clarification is in order. You highlighted many of the key advantages and disadvantages of having a LLC for this purpose, and I agree that having umbrella insurance is a good idea. However, insurance is not the same as having a properly formed LLC when it comes to asset protection. Insurance provides you a funding source to resolve disputes over your liability, and possibly to settle and pay claims. To all of this, I would caution investors not to get suckered into expensive and complicated “hide the ball” asset protection schemes, where you are advised to form an entity in one state and then make it a member of an LLC in another state. Not only is this expensive, but of dubious effect. It is more likely that you will lose track of your entities and miss a filing deadline, exposing yourself to full liability because your entity is suspended. I advise my entity clients to “keep it simple.”
    Jeffrey Hare
    Replied about 6 years ago
    Ali, I think a clarification is in order. You highlighted many of the key advantages and disadvantages of having a LLC for this purpose, and I agree that having umbrella insurance is a good idea. However, insurance is not the same as having a properly formed LLC when it comes to asset protection. Insurance provides you a funding source to resolve disputes over your liability, and possibly to settle and pay claims. To all of this, I would caution investors not to get suckered into expensive and complicated “hide the ball” asset protection schemes, where you are advised to form an entity in one state and then make it a member of an LLC in another state. Not only is this expensive, but of dubious effect. It is more likely that you will lose track of your entities and miss a filing deadline, exposing yourself to full liability because your entity is suspended. I advise my entity clients to “keep it simple.”
    Tim Norris
    Replied about 6 years ago
    I agree, Jeffrey. It is really not an issue of “either/or” as an umbrella/liability insurance and an LLC are/could be created for different reasons. Think of the LLC and other work you may do with legal and financial advisers (such as attorneys and accountants) as your “castle walls and moat” around your assets, personal and otherwise. Think of the insurance you secure as an “archer in the watchtower”. In other words, the walls and moat should be your foundation as it pertains to protecting you/your assets. The archer (insurance) won’t pick off every bad guy that tries to get in, so having the walls and moat is vital. Think of them working together not in lieu of each other.
    Ali
    Replied about 6 years ago
    Love the analogy Tim!
    Alan DeRossett Investor from Thousand Oaks, California
    Replied 5 months ago
    Insurance is great for lawsuits worth less than $5 million but unaffordable after that, an LLC also is needed to offer you complete protection for your assets for those $30 million dollar suites we all hear and see. U was once sued for $23.5 Million when 21 many years ago!. I won it cost $30k in legal cost and liability insurance will never cover these outlying lawsuits or lawyers trying to attach your assets.
    Ali
    Replied about 6 years ago
    Thank you Jeffrey, that is great advice. Even something I wasn’t aware of!
    Paula R. Investor from Truth Or Consequences, New Mexico
    Replied almost 4 years ago
    Good advice, Jeffrey, to “keep it simple”. But my sis (who, perhaps importantly, lives in CA) and I (in New Mexico) want to buy a rental property here in NM. Since we both have other properties, I was thinking a NM LLC (which I’m told is even better than NV in terms of reporting and protecting the corporate veil) would be the best way to protect us in the event of a lawsuit. Now my insurance agent (Allstate) says he can’t insure an LLC or even list it as an additional insured–only the two of us personally. Anyone have any advice on how to set this up for best protection for the two of us? We’ll be paying cash. Thanks!
    Jeff Brown
    Replied about 6 years ago
    RE: Financing. I’ve had to put the brakes on many 1031s over the years, before they sold, or closed a pending sale of property about to be exchanged, tax deferred. They had the property in an LLC, or family limited partnership, or any of the other ‘cool’ ways of holding property. If they’d closed the sale of what woulda been called the ‘relinquished’ property, the IRS wouldn’t of had a problem with them completing the 1031 as ‘123 LLC’. However, as you so rightly pointed out, the lenders simply won’t loan to the LLC. The investor, remembering they’ve gone in and out of their family trust for the same reason, lending that is, they transfer the property from the LLC to themselves. That’s the end of their tax deferred exchange. The rules require the exchange to begin/end with the same ownership. John Doe sold the relinquished property? John Doe will dang well acquire/close the new property(s), or ‘upleg’. Good stuff, Ali.
    Ali
    Replied about 6 years ago
    Thanks, Jeff. Great real-life practical example of when an LLC can hurt more than harm. Moral of the story, if you don’t really need one, don’t get one. But if you need it, just be aware of potential hurdles later. Thanks for sharing your experience!
    Jason Carter
    Replied about 6 years ago
    Forgive me if I’m not following correctly Jeff (and chances are I’m not) but if one had their property in an LLC and wanted to do a 1031 are you saying they should transfer the property out of the LLC before even beginning a 1031? Or are they just screwed? Just curious. In my experience, asset protection has been the most confusing aspect of RE investing. I get a different answer from whoever I talk to. Thanks!
    Shaun
    Replied about 6 years ago
    Not an expert at all, but I’m pretty sure the entity that is exchanging into the new place had to be the one that originally took title of the relinquished one. I don’t know if quit claiming in and out of entities during the hold time messes things up in the end.
    Monika
    Replied almost 5 years ago
    Yes, the loan would have to be in the same name. Some lenders are willing to then do a second note in a new entity name, if need be. You and the lender would agree on that structure on the front end. Transferring the assets twice creates twice the paperwork and more credit risk for the bank in the interim (sometimes the new asset in the original LLC name for a month), so it would have to be worth it risk/return-wise for the bank. I have only seen this done with $500K plus loans to business clients that have $3M in loans with the same institution.
    Monika
    Replied almost 5 years ago
    Yes, the loan would have to be in the same name. Some lenders are willing to then do a second note in a new entity name, if need be. You and the lender would agree on that structure on the front end. Transferring the assets twice creates twice the paperwork and more credit risk for the bank in the interim (sometimes the new asset in the original LLC name for a month), so it would have to be worth it risk/return-wise for the bank. I have only seen this done with $500K plus loans to business clients that have $3M in loans with the same institution.
    Jim Pratt
    Replied about 6 years ago
    When I wanted to do an LLC, it took my CPA and lawyer less then 2 minutes to talk me out of it for the exact same reasons you stated. Umbrella insurance is a lot more cost effective and easier to do. One- one million dollar policy covers everything I own, up until I use it (Murphy’s Law).
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    Jim, I went to an attorney involved on the law suit side to see how much insurance to get. His response changed my mind. During his investigative stage he finds the value of asset and the amount of insurance. He adds them together as the absolute floor for his law suit plus legal cost. Then adds to that. During the legal process it’s rare to get back to the floor during the settlement. He was not talking about a frivolous law suit. But one with some basis. That changed my mind. Now I have both insurance and an LLC where I can (more of a loan issue).
    John Thedford
    Replied about 6 years ago
    In some states an LLC may not offer any protection contrary to what some people believe. In Florida, a single member LLC offers zero protection due to a supreme court ruling. When we did a LLC in Florida we set it up with multiple members for this reason. I like the benefits of the LLC and believe it offers better protection than a S-corp.
    Keith Gillispie Flipper/Rehabber from Kaneohe, HI
    Replied almost 3 years ago
    Hi John Thedford, Could you please go into some detail if you are still of this opinion. I realize that 3 years have gone by since you posted this, and something may have changed. DO you still believe that LLCs give better asset protection than S-Corps?
    Paul
    Replied about 6 years ago
    Thanks Ali for the timely post…This was going to be a question on the forums this week for this new investor…I don’t believe I’ll be setting up an LLC right away…Thanks again for the information as well as the responses that followed Paul
    Ali Boone
    Replied about 6 years ago
    Ha. Jim, I find that Murphy’s Law tends to love to hang out around real estate, don’t you? 🙂
    John Thedford
    Replied about 6 years ago
    p.s. –we recently had an attorney speak at our local REIA meeting and his suggestion was holding properties in land trusts. He tied those in to an LLC with the LLC being the beneficiary of the land trust. That is the current route I am exploring with my attorney who stated he prefers that land trusts as well for a few different reasons (it is easier to keep your name out of the public records which is often where people start looking to see your assets).
    Ali Boone
    Replied about 6 years ago
    John, feel free to share what you learn. I know nothing about land trusts myself.
    Sanjay Verma from Richmond, Virginia
    Replied over 4 years ago
    Hi John, would be great if you can share more about the path that you took with the land trust and LLC being the beneficiary of such a trust. Also, what might that mean from a taxation perspective? IS the land trust or the LLC a separate entity paying taxes at higher slabs?
    Toby Johnston
    Replied about 6 years ago
    Nice summary, including all the follow up comments. Just so that no one is lead astray, if you are using the LLC to hold long term passive investments, there are really no income tax advantages that you can’t get holding title in your own name or name of your living trust. I am a CPA and do a lot of work with real estate investors. The idea that you can get substantial tax savings from an LLC (again in the passive investment context) is sort of a myth that I have to educate many of my clients on. If it were the case, then the extra fees for tax filings and accountants would pay for themselves with tax savings. From a professional perspective, I love the extra fees I can charge for doing LLC tax returns but I only recommend clients use them for one or more of the following reasons: 1) multi member ownership 2) substantial personal net worth liability protection 3) valuation discounts for transferring ownership in an estate planning context 4) privacy / identity protection
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    Toby, I like your post. I have a 5th unless you consider it to be within number 2. If you have multiple properties having them in several LLCs allows for one to run into legal issues and basically go to zero without affecting the others. This is assuming we are not talking negligence by the owner outside of the LLC which removes all barriers. Some think the value might be $250,000 to maybe $500,000. Not numbers for someone just starting out though. So lets say $100,000 rentals with 30% equity and a 5% reserve to start. You have 8 or 10 properties. Accounting cost and annual filing cost (NC is $200 per year) go down in relation to the total. Many in retirement have that in their 401k or IRA. A great source for real estate. You’ll need a Non Recourse Loan and a reserve. Some use number of properties, say 3 to 5 $100,000 (with debt) and expect them to grow over time with rental income and debt buy down. Generally a wealth building strategy, not income. As to any tax advantage, there is if you own an S-Corp to manage your properties (not those held in a 401k or IRA). The same expenses are handled differently as you know in an S-Corp.
    Sanjay Verma from Richmond, Virginia
    Replied over 4 years ago
    Hi Toby, thanks for the summary with the authority of a CPA. At what level does the personal net worth protection become worth it (or substantial enough for LLC protection to be worth it)?
    D Decker Investor from Old Greenwich, Connecticut
    Replied almost 4 years ago
    If you decide to change the property from “own name” to “LLC” ownership, how do you make the change on Schedule E to get the property from page 1 (properties in own name) to page 2 (partnerships and LLCs)? Also, how do you make sure that the loss carryforwards continue?
    Ali Boone
    Replied about 6 years ago
    Toby, thanks for the input! Great words from the accounting side. But I agree, I never could quite figure out the tax benefits. Thanks for clarifying!
    Toby Johnston
    Replied about 6 years ago
    Nice summary, including all the follow up comments. Just so that no one is lead astray, if you are using the LLC to hold long term passive investments, there are really no income tax advantages that you can’t get holding title in your own name or name of your living trust. I am a CPA and do a lot of work with real estate investors. The idea that you can get substantial tax savings from an LLC (again in the passive investment context) is sort of a myth that I have to educate many of my clients on. If it were the case, then the extra fees for tax filings and accountants would pay for themselves with tax savings. From a professional perspective, I love the extra fees I can charge for doing LLC tax returns but I only recommend clients use them for one or more of the following reasons: 1) multi member ownership 2) substantial personal net worth liability protection 3) valuation discounts for transferring ownership in an estate planning context 4) privacy / identity protection
    Jared
    Replied about 6 years ago
    I’ve never had a problem with the due on sale clause. That hasn’t been an issue for years. I’ve used LLCs and they have been proven to be the safest way to asset protect your individual rental properties. It’s important that they separate out each rental property into its own LLC so that properties with equity are not attached to any kind of lawsuit that would happen on the one property getting sued. LLCs are a great way to go and most banks, if not all banks, will understand why you would quit claim your property into an LLC. It’s a very standard practice. Now, I’m not an attorney. But the five attorneys that I’ve met with on a constant basis would agree with me. At least, they are the ones that came up with this reasoning, And it’s worked for the multiple properties that I own… So far. And, I’ve also found a ton of protection there from the frivolous lawsuits that have hit me as a rental property owner. It’s just part of life. If you own property, you are going to get sued at one point. Tenants are notorious. No matter how good the landlord you are, it happens, so take a breath and get a good attorney. All the best – Jared
    Ali Boone
    Replied about 6 years ago
    Jared, you’re right, quit claiming isn’t the hard part. And the due on sale trigger is only a slight chance, so more likely not to happen, but it can so people need to be aware.
    Mike
    Replied over 5 years ago
    Jared, It sounds like you’ve got the best protection setup. So you have a seperate LLC established for each property? How much extra expense is that at tax time and have you run into trouble getting a loan with the LLC? Ali and all, this is some great information. Thanks.
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    Jared I agree an LLC is the way to go. Although I have both. Like many when you start out it may be tough to get your property settled in an LLC. I have not had the same luck in the legal area when moving a property with the quit claim process. Your loan is still public record. So as I posted above, I checked with a lawyer on the law suit side. What’s he do, he notifies the mortgage company. I called the holder of my mortgages for three of my properties. They have a policy that they not lend to LLC under any circumstances. I did not borrow the money from them. My loans were sold within weeks of settlement. They would absolutely implement the due on sale clause if they found out. So your law suit could be the reason they find out.
    Jared
    Replied about 6 years ago
    I’ve never had a problem with the due on sale clause. That hasn’t been an issue for years. I’ve used LLCs and they have been proven to be the safest way to asset protect your individual rental properties. It’s important that they separate out each rental property into its own LLC so that properties with equity are not attached to any kind of lawsuit that would happen on the one property getting sued. LLCs are a great way to go and most banks, if not all banks, will understand why you would quit claim your property into an LLC. It’s a very standard practice. Now, I’m not an attorney. But the five attorneys that I’ve met with on a constant basis would agree with me. At least, they are the ones that came up with this reasoning, And it’s worked for the multiple properties that I own… So far. And, I’ve also found a ton of protection there from the frivolous lawsuits that have hit me as a rental property owner. It’s just part of life. If you own property, you are going to get sued at one point. Tenants are notorious. No matter how good the landlord you are, it happens, so take a breath and get a good attorney. All the best – Jared
    Terry P
    Replied about 6 years ago
    “p.s. –we recently had an attorney speak at our local REIA meeting and his suggestion was holding properties in land trusts. He tied those in to an LLC with the LLC being the beneficiary of the land trust. That is the current route I am exploring with my attorney who stated he prefers that land trusts as well for a few different reasons (it is easier to keep your name out of the public records which is often where people start looking to see your assets).” I read about this a little, seems like another myth. There’s no hiding from tenants, management companies, tax assessors, HOAs, mortgage companies, contractors, that record to the public, etc. Often a contract is not legal until it is public record. Perhaps if you are one to own free and clear properties and you want to make it a little more difficult for prosecuting attorney’s to find you, but a good one will find you and your assets make no mistake. Begs the question why hide? Also, having your assets go to an LLC after death may be too late if someone does find you, and difficult to manage and distribute in estate planning and probate. Sounds convoluted to me, having an LLC operating agreement, partners, contracts, as beneficiaries to a land trust. I’m about ready to place a mechanics lien on a rental of a client, name is on my contract, recorded public mortgages, etc, making it very difficult for a REI to conduct business and hide behind a land trust. Now series LLC’s are getting popular, my state just approved them. Seems like a way to make it more complicated legally and to insure, I imagine another attorney’s brilliant idea. I have a dead beat client right not I did some construction work for that is a REI inc, I am a LLC. I have to hire an attorney to collect the $6500 owed. I am contemplating going to small claims where the limit is $4K and take a $2K loss since I can rep myself. Attorneys want 40%, collection agencies 33%, if I were a SP I could represent myself in district court and with the contract I have a slam dunk! If you are an LLC and you fail to just put your title by your contract signature the court will see you acting as a SP and treat you as such, or use your business account for personal, etc, lots of dos and don’t around the LLC law, small details a prosecuting attorney will have a field day with if not managed properly, knowingly or unknowingly.
    John Thedford
    Replied about 6 years ago
    It is not about hiding from tax assessors, prosecuting attorneys, etc. It is about protecting assets as well as having your assets less exposed from public view. Ever heard of a nuisance suit? That is just one reason to use the land trust strategy. Nothing is foolproof but why increase odds of problems?
    Terry P
    Replied about 6 years ago
    Well for one, a construction company will never sign a contract to do work to a land trust property if you want to hire a contractor, nor will a management company, lender, etc. When you talk about “having assets less exposed” what is that besides hiding? The only worries are from creditors, or judgments, that you either owe or are guilty of. In that case, a prosecuting attorney is coming after you, the plaintiff’s attorney can still do discovery and by law you have to disclose assets. All a land trust does is hide your name and you trustees, but it will not be hard to find unless you do your rental business in a closet, or try.
    Terry P
    Replied about 6 years ago
    “ I’ve used LLCs and they have been proven to be the safest way to asset protect your individual rental properties. It’s important that they separate out each rental property into its own LLC so that properties with equity are not attached to any kind of lawsuit that would happen on the one property getting sued. It’s a very standard practice. Now, I’m not an attorney. But the five attorneys that I’ve met with on a constant basis would agree with me. At least, they are the ones that came up with this reasoning, And it’s worked for the multiple properties that I own… So far. And, I’ve also found a ton of protection there from the frivolous lawsuits that have hit me as a rental property owner. It’s just part of life. If you own property, you are going to get sued at one point. Tenants are notorious. No matter how good the landlord you are, it happens, so take a breath and get a good attorney. All the best – Jared” Attorneys and legislators are notorious and commonly known for creating complex legal matrix’s that reap them the maximum amount of profits. I don’t even listen to 25, you really have no idea that what they are recommending is valid until you go to court and see how you make out. You would be better off looking at some case law, or have these attorney’s point you to some in your state, or a statue(s). Anything less is heresay. I did a search to find some cases where having properties in separate LLCs or series LLCs and found none in my state, please post some. The only time I found that a charging order and foreclosure was upheld to the plaintiff was in the case of fraud. You don’t need ten LLCs for ten properties, ridiculous! Lawyers making $ is all that is. I’d be interested in seeing proof otherwise as in a case.
    Ali Boone
    Replied about 6 years ago
    I’ve heard the same thing over and over, Terry. Good note. Lawyers can be salespeople with the best of them. I’ve had some big investors tell me how it is very easy to “over protect”, i.e. spend a ton of complicated strategies because lawyers said so. They got caught in it themselves and have learned from it and were able to warn me off from it. Have to find that balance.
    Mark B
    Replied almost 4 years ago
    Ali, I have read most of the comments and have to say it looks easy to get confused. My situation is that that my wife and I own three rental houses outright in Oklahoma. We do have an LLC but have not moved the properties into the LLC as of yet. I think I will go ahead based on what I have learned and on the advice of our tax preparer. I would really like your opinion on my situation if you care to reply. Thank you very much.. Mark B
    Mark B
    Replied almost 4 years ago
    Ali, I have read most of the comments and have to say it looks easy to get confused. My situation is that that my wife and I own three rental houses outright in Oklahoma. We do have an LLC but have not moved the properties into the LLC as of yet. I think I will go ahead based on what I have learned and on the advice of our tax preparer. I would really like your opinion on my situation if you care to reply. Thank you very much.. Mark B
    Sharon Vornholt
    Replied about 6 years ago
    Ali – I didn’t use this myself, but a lot of folks here buy in a trust and make the LLC the beneficiary of the trust. Like you said, I think it just all depends on each person’s situation. Sharon
    Ali Boone
    Replied about 6 years ago
    I do know an investor Sharon who did just that. He liked it. I don’t know much about it, but definitely an option.
    yash
    Replied about 6 years ago
    Does the $21 umbrella cover you for fire insurance? If not which one is a good option What differences are there between LLC and INC
    Ali Boone
    Replied about 6 years ago
    Yash, fire should already be covered in the standard homeowner’s insurance policy you have on a property.
    wendy
    Replied about 5 years ago
    In Florida, we cannot seem to purchase homeowner’s insurance on properties titled in an LLC. Citizens, the seemingly only insurer,will not cover it unless it is titled in our name.
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    It’s commercial insurance
    Terry P
    Replied about 6 years ago
    LLCs have commercial general commercial liability and WC policies, not umbrella’s, and yes fire is included with exclusions. INC corporation also offers liability protection but differs from an LLC in terms of ownership structure and rules, regulations they have to follow, management overhead and tax treatment of profits.
    Ryan
    Replied about 6 years ago
    When I bought my first rentals and started pursuing putting them into LLC’s I was pretty surprised at the advice I was given. After talking with my RE agent, insurance agent, property manager, CPA, and an attorney not a single one recommended it. These people all own their own personal rentals and deal day-in day-out with investors. All gave the same advice, purchase an Umbrella Policy.
    Ali Boone
    Replied about 6 years ago
    Ryan, I had the same experience from all the same players!
    Robert Steele
    Replied about 6 years ago
    Don’t forget who will be fronting the litigation costs if you are sued. Either your LLC or your insurance company. I know which I would prefer.
    Terry P
    Replied about 6 years ago
    You would have to be a fool to have an LLC and not insure it with a commercial liability policy as well as WC law suit protection should someone get injured on one of your properties and sue you for negligence. Some states have laws that if you have anything to do with roofing, rehab, you have to prove you have liability and WC insurance to the states Attorney General’s Office and register with them for a filing fee. This is what I meant by some REI’s acting as GC not knowing what they are doing and before you know it they are paying a $10,000 fine, and no an umbrella policy won’t cut the mustard here those are for homeowners.
    Ali Boone
    Replied about 6 years ago
    Sounds like more expenses to me.
    Ali Boone
    Replied about 6 years ago
    Great point, Robert!
    Terry P
    Replied about 6 years ago
    You would have to be a fool to have an LLC and not insure it with a commercial liability policy as well as WC law suit protection should someone get injured on one of your properties and sue you for negligence. Some states have laws that if you have anything to do with roofing, rehab, you have to prove you have liability and WC insurance to the states Attorney General’s Office and register with them for a filing fee. This is what I meant by some REI’s acting as GC not knowing what they are doing and before you know it they are paying a $10,000 fine, and no an umbrella policy won’t cut the mustard here those are for homeowners. Reply Report comment
    Bradley B. Clark
    Replied about 6 years ago
    Ali, I am a Texas attorney and I have formed a number of series limited liability companies for my real estate investor clients (both residential and commercial). In addition, I have converted several limited liability companies to series limited liability companies. I have written and spoken on the series limited liability structure. For the unfamiliar, a series limited liability company is an LLC that, in essence, has a “master” LLC and one or more individual “series”. (More on this in the last section – below the dashed line.) The following states have a series limited liability statute: Delaware (since 1996), Texas (since 2009), Illinois, Iowa, Nevada, Oklahoma, Tennessee, Utah, Kansas, District of Columbia, and Puerto Rico. Each state is a bit different and your readers in these states should consult an attorney familiar with their state’s statute (and any relevant case law interpreting that statute). In Texas (under the Texas series limited liability statute), a series LLC is a great choice for real estate investors. It offers all the advantages you mentioned in your article (i.e., asset protection, tax advantages, and it sounds really cool). More importantly, however, it ameliorates many of the disadvantages you identified. Briefly, here’s why: (1) Cost: In Texas, the filing fee for a series LLC is $300 ($325 if expedited). Every time a new series is added to the series LLC the owner does not have an additional filing fee. (2) Financing: Many larger lenders in the states I identified above are becoming more comfortable with this choice of entity. Depending on the borrower, some lenders may want to cross-collateralize the assets (cross-collateralization is often required by lenders making a loan on multiple properties in the series LLC) and most still require a personal guarantee (which most of the time can be negotiated to include the so-called “bad-boy carve-outs”). (3) Non-foolproof asset protection: In a business friendly state like Texas (and Delaware), states are respecting the individual structure of each series. As long as the owner keeps a proper accounting among the assets there should not be any issues. Series “A” will only be liable for the debts and obligations of Series “A” and Series “B” will only be liable for the debts and obligations of Series “B”. In other words, a lawsuit against Series “A” won’t affect “Series “B”. (4) Triggering due-on-sale clauses. This is only a disadvantage if the respective loan is not personally guaranteed. If the loan is personally guaranteed then this shouldn’t be a problem (just be sure to get consent from each lender). ————- A typical series LLC structure for many of my real estate investor clients looks like this (I’ll use my last name in the example): Master LLC = Clark Holdings, LLC, a Texas series limited liability company. First series = Clark Property Management, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company. Second series = 123 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company. Third series = 456 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company. I run my property management through the first series. The second and third series each hold their respective property and the respective debt. If, subsequently to setting up my series LLC, I buy another property, I simply add a fourth series (i.e., 789 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas limited liability company). If I subsequently sell the asset in the first series, I then can dissolve that individual series. I hope this gives you and your readers some valuable insight in to the structure of a series LLC. Yours truly, Bradley B. Clark Reply Report comment
    Bradley B. Clark
    Replied about 6 years ago
    Ali, I am a Texas attorney and I have formed a number of series limited liability companies for my real estate investor clients (both residential and commercial). In addition, I have converted several limited liability companies to series limited liability companies. I have written and spoken on the series limited liability structure. For the unfamiliar, a series limited liability company is an LLC that, in essence, has a “master” LLC and one or more individual “series”. (More on this in the last section – below the dashed line.) The following states have a series limited liability statute: Delaware (since 1996), Texas (since 2009), Illinois, Iowa, Nevada, Oklahoma, Tennessee, Utah, Kansas, District of Columbia, and Puerto Rico. Each state is a bit different and your readers in these states should consult an attorney familiar with their state’s statute (and any relevant case law interpreting that statute). In Texas (under the Texas series limited liability statute), a series LLC is a great choice for real estate investors. It offers all the advantages you mentioned in your article (i.e., asset protection, tax advantages, and it sounds really cool). More importantly, however, it ameliorates many of the disadvantages you identified. Briefly, here’s why: (1) Cost: In Texas, the filing fee for a series LLC is $300 ($325 if expedited). Every time a new series is added to the series LLC the owner does not have an additional filing fee. (2) Financing: Many larger lenders in the states I identified above are becoming more comfortable with this choice of entity. Depending on the borrower, some lenders may want to cross-collateralize the assets (cross-collateralization is often required by lenders making a loan on multiple properties in the series LLC) and most still require a personal guarantee (which most of the time can be negotiated to include the so-called “bad-boy carve-outs”). (3) Non-foolproof asset protection: In a business friendly state like Texas (and Delaware), states are respecting the individual structure of each series. As long as the owner keeps a proper accounting among the assets there should not be any issues. Series “A” will only be liable for the debts and obligations of Series “A” and Series “B” will only be liable for the debts and obligations of Series “B”. In other words, a lawsuit against Series “A” won’t affect “Series “B”. (4) Triggering due-on-sale clauses. This is only a disadvantage if the respective loan is not personally guaranteed. If the loan is personally guaranteed then this shouldn’t be a problem (just be sure to get consent from each lender). ————- A typical series LLC structure for many of my real estate investor clients looks like this (I’ll use my last name in the example): Master LLC = Clark Holdings, LLC, a Texas series limited liability company. First series = Clark Property Management, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company. Second series = 123 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company. Third series = 456 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company. I run my property management through the first series. The second and third series each hold their respective property and the respective debt. If, subsequently to setting up my series LLC, I buy another property, I simply add a fourth series (i.e., 789 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas limited liability company). If I subsequently sell the asset in the first series, I then can dissolve that individual series. I hope this gives you and your readers some valuable insight in to the structure of a series LLC. Yours truly, Bradley B. Clark
    Terry P
    Replied about 6 years ago
    Have you ever tried any cases with a said series LLC in TX? If so please post a link? Here, KS case law continues to redefine LLCs with case law even recently where Davis, indemnification of attorney fees to a poorly written statue: http://www.llclawmonitor.com/2013/05/articles/indemnification-1/kansas-court-enforces-statutory-indemnification-and-awards-attorneys-fees-in-fiduciary-duty-lawsuit/ You’ll also find a lot of other states challenging LLC statues on the internet making them in part vague and ambiguous, convoluted, as Reed points out. I’d be interested in your take on Reeds position. http://www.johntreed.com/entity.html Here is the statue for Series LLCs in my state of KS. http://www.kslegislature.org/li_2012/b2011_12/statute/017_000_0000_chapter/017_076_0000_article/017_076_0143_section/017_076_0143_k/ Like TX if the operating agreement, Articles of Incorporation, series names @ our Secretary of State, are set up properly each series can be a separate legal entity. You don’t need an attorney to set up a LLC or an LLC it is simple to register them at the states website, and find the statues that govern them. http://www.kslegislature.org/li_2012/b2011_12/statute/017_000_0000_chapter/017_076_0000_article/017_076_0143_section/017_076_0143_k/ Also, not too difficult to set up an Operating Agreement. Here it only cost $160 to register a LLC, series LLC $250 and $100 to add a series. I can see a lot of legal fees some would pay to have this set up without knowing the outcome in a court of law, case law that interprets statues, especially multimember LLCs. Also, series LLCs are difficult to insure my agent tells me so check it out. If it cost a fortune to insure them and/or creates legal or insurance, contract, ambiguity or complexity, maintain them, etc, then what is the point. Looks more cost effective then filing separate LLCs for each property but who really knows the difference. Begs the question why all states do not have this statue, also why all states do not allow foreclosure. I think Reed is correct what a legal mess and there is no answer. Looks like some flexibility tax wise which is good here they can be treated as a single entity or a series.
    Bradley B. Clark
    Replied about 6 years ago
    Terry, I’m not sure I understand what you are asking in the first paragraph. As for Reed, I do not know him and have no opinion on his opinions which appear to be based on his years of experience as an investor. That experience is, no doubt, very valuable, and everyone can learn form another’s experiences. Each state’s series LLc statute is different and each state’s corpus of case law interpreting their respective series LLC statute—not to mention their LLC statute—is different for a myriad of reasons. One issue with using DIY legal is the possibility of omissions which the non-lawyer isn’t necessarily going to realize. Finally, having an attorney prepare the documents also serves as an insurance policy. I’ve enjoyed this topic of discussion; thanks for replying to my comment. Yours truly, Bradley
    kiz
    Replied about 6 years ago
    Bradley, Can you comment on liability limits that LLC can be sued for in Texas? Are there caps in place? Or is this one of those myths.
    Jamie Addeo Professional from Long Island City, New York
    Replied almost 5 years ago
    Bradley, Would you recommend a Series LLC when owning properties in Multiple states? My series LLC is set up in Delaware. I am about to add two additional series: First is; 123 Main Street in NEW JERSEY and the second is: 123 Main Street in CALIFORNIA. What are your thoughts on this?
    Ali Boone
    Replied about 6 years ago
    Definitely, Bradley. Thanks!
    R Joseph Holman from Syracuse, New York
    Replied over 2 years ago
    Excellent and comprehensive…..Thank You.
    Terry P
    Replied about 6 years ago
    Also if your insured LLC manage subs in a rehab situation (where risk is high of personal injury) there is little chance they can file a claim and your premiums sky rocket. You really do not want claims against your policy either.
    brian
    Replied about 6 years ago
    useful tips here. Our estate attorney said said after 40years doing law that LLC’s are easy to penetrate and we went with a trust so the real estate is in the trusts name(more so for estate planning and taxes) and we have a large umbrella policy. Attorney said that as long as your are aren’t negligent then its hard for a landlord to be held liable. It does though depend on if you actively manage or outsource to a property manager. Also depends on if you are local or not to your properties to keep an eye out on property condition/maintenance.
    Ali Boone
    Replied about 6 years ago
    Interesting, Brian. Not sure there.
    Jeffrey Hare
    Replied about 6 years ago
    Ali’s original post has morphed into an interesting discussion about various asset protection strategies, some of which are truly “urban myths,” and others may be valid depending on which State you do business in. However, there continues to be a disturbing trend to confuse the role of insurance and entity, and some continue to confuse a trust as an entity. Tax considerations play a major role in determine the type of entity you want to use. No form of entity, nor any insurance policy will protect you against acts of fraud or willful or deliberate acts of negligence. Insurance is for catastrophic occurrences; they are not legal entities. Trusts are great for estate planning, but do not provide any asset protection. Land trusts and other “hide the ball” techniques promoted by some individuals (who make money setting them up), are not a form of asset protection – only delay, and in some cases – illegal. Setting up a LLC should be thought of as starting a business, not a hobby. It needs to be properly maintained, managed and operated like a business. If the costs are not justified, don’t do it. That is what Ali was saying. Consult with a legal and a tax professional; don’t rely on what “some guy at the REI Club” said worked for him.
    Ali Boone
    Replied about 6 years ago
    Perfect comment Jeffrey. Great summary and clarification. All the options should not be considered as equal alternatives to each other, but rather different options that can cover similar goals. The first thing to be understood should be the goals (asset protection, taxes, etc) and then compare each of the options. None are replacements for the other and the professionals need to advise each individual situation. Just be careful what pros you talk to.
    Terry P
    Replied about 6 years ago
    Yes good post Jeffrey, alot of confusion out there and well said an insurance policy is not an entity.
    Ali Boone
    Replied about 6 years ago
    Bryan, yeah that is a CA thing. I wouldn’t be surprised in the slightest if they are the only ones that hefty.
    Scott Mastin
    Replied about 6 years ago
    Hi Ali, I currently have my properties in an LLC but it’s important to check the local laws regarding operations of an LLC for rental real estate. In my market, Washington, DC, LLC’s cannot represent themselves in court actions. This means hiring a lawyer for everything whether you can do it yourself or not. It can get costly, especially for beginners. Great topic and information. Thanks for the article.
    Ali Boone
    Replied about 6 years ago
    Great point, Scott. A lot of people don’t realize how much more expensive an LLC can be! Thanks for sharing.
    Joe R
    Replied about 6 years ago
    Great info thanks for the enlightening article! For the “umbrella” policy many have discussed here, is that putting all the rentals under one policy and what are the coverages/avg annual cost per # properties? I have 3 rentals currently all with separate policies. Thanks!
    Ali Boone
    Replied about 6 years ago
    Hi Joe. It may vary some from different insurance companies, but all my properties are covered for $20-something per month. Very cheap. The umbrella policy though is on top of the normal individual property insurance policies. So each property has their own, like normal, and then the umbrella encompasses all of them together, and I even think it covers other assets I have too… can’t remember the details. I think it’s $1M coverage total.
    Scott M
    Replied about 6 years ago
    I have a question. Can you keep the property in your personal name (to avoid due-on-sale clause), but still utilize an LLC as the property management company? In other words, what if I am personally on the house’s title, but I use XYZ Rental Properties, LLC (my LLC) on the lease to “manage” the property. All the rent money, mortgage payment, repair expenses, etc would flow through XYZ Rental Properties, LLC checking account rather than my own personal account. Of course this wouldn’t be the same amount of protection as quit-claiming the entire title over to the LLC, but it seems like this would still offer at least SOME amount of protection. If the tenant slips on an icy driveway and paralyzes themselves, it was the property management company who didn’t properly salt it, right? I am just thinking out loud here, let me know if this is all nonsense.
    Shaun
    Replied about 6 years ago
    Not an attorney but I’d expect the owner to get sued. I would not be surprised if they Sue the management company too. Might even try to Sue the manager if they say the cause was due to willful negligence. In all these cases they would be suing you. I wouldn’t expect any liability protection for you personally in this case. Maybe if you had all your cash in the LLC they might not get access to that if they don’t Sue management or don’t win if they do.
    Ali Boone
    Replied about 6 years ago
    Hmmmmmm. Not sure Scott, on the part about who would be liable. When setting up an LLC, you will have either a passive income LLC (rental properties) or an active income (a business, like property management). Or, at least you should have only one or another for tax purposes. So if you were to set up that property management company, that would be just like setting up another company, totally unrelated to your properties in terms of who gets what income and the responsibility should something happen. Don’t quote me, but I don’t think scooting the liability to the “property management company” would work. In thinking about my properties, should I get sued it will all be on me, not my management company. Unless it was negligence on their part and I sue them because I’m being sued. See what I mean? Not sure on that. Maybe some property managers out there can chime in on this one.
    Terry P
    Replied about 6 years ago
    Ali is correct, a typical property management company has contracts with property owner’s that is different than what Scott is proposing. BTW liability insurance policies will typically not allow shifting liability contractually, if you do you are not insured and on your own. The vehicle for what Scott is proposing is called an LLC ‘Operating Agreement’ and ‘Articles of Organization’, along with other state registration requirements. The only way to make legal what you are proposing is an LLC has to hold title to protect the asset, that is why most QCD. Just go to your states legislature website and read the statues on LLCs and series LLCs, look for any sub chapters that prohibit holding title in your name or that state the LLC has to hold title or the asset, and having a separate company manage. Another good check is for case law in your state that interprets statues, goggle that or check a law library.
    wendy
    Replied about 5 years ago
    My understanding is that in most states property managers have to be licensed real estate agents. I do not understand the discussion of tax benefits. We were just audited by the IRS and we’re told we cant take business deductions for real estate investments because we are not licenses real estate agents who spend x amount of hours selling real estate.
    Liam G
    Replied about 6 years ago
    I use an LLC for asset protection. I work with a regional bank and have no trouble with financing for my properties. My bank works in the mid-Atlantic area; they never once blinked an eye when lending to an LLC. I am not personally on the hook for any of the loans, but my LLC is, and as manager, I get a ‘courtesy’ call if any of my properties become nonperforming (aka: defaulting on the loan). I have signed a No-Contest agreement, meaning that if I decide to stop paying on my loans, there is no foreclosure process, I have simply forfeited the property to cover the loan.
    Shaun
    Replied about 6 years ago
    Liam are you getting “residential” loans, aka 30 year fixed at low rates? I assume they are doing commercial loans for you. Good option to have but most people will get sticker shock with higher rates, bigger downs, shot amortization schedules and balloon payments.
    Liam G
    Replied about 6 years ago
    Shaun, No, I only have access to commercial paper: 5-5-5 ARMS, 25% down at 6.06% right now. I responded to Ali above with some of my background, but the short story is that I have a bunch of lawyers in my family, so my world view is jaded!
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    Liam, I know I’m replying to a post that’s a couple years old but if you’re still around do you mind telling me who you are using? I get a blank look at the banks I’ve checked near me. I am using North American Saving Bank. I think they are out of Kansas. I’m buying in North Carolina and Maryland. It would nice to have more than one option. I have also been contact with B2R Finance but there rate are high and they are just getting into the lower end.
    Ali Boone
    Replied about 6 years ago
    That almost seems too good to be true Liam. If nothing else, when a mortgage is in an LLC’s name, it is still backed personally. I’d be curious how you’ve been able to avoid every complication and risk out there…
    yash
    Replied about 6 years ago
    Canadian investors to sunshine states are advised on having the LLC for each of their properties in sunshine states FL, AZ , CA TX, GA etc but the point is it cuts into the cashflow if costs for liability and fire insurance are factored Anyone have a less than $50 monthly to cover all costs related to forming maintaining LLCs and insuring properties? Note other accounting costs and management fees are excluded here
    Ali Boone
    Replied about 6 years ago
    Yash, things are totally different if we are talking about international investors. All international investors need the LLC (or proper equivalent) because they aren’t US citizens, so they need it for the income and taxes and all sorts of stuff. Totally different ballgame than US investors.
    Terry P
    Replied about 6 years ago
    Forfeiting foreclosure rights and equity may not be an option for most investors. Most banks regardless of how large your assets are will want you to personally back LLC loans. Makes you wonder what the point in building credit is. The reason is the legal process differs from SP in that a creditor has to obtain a charging order to collect a debt from an LLC, and in some states they are not allowed to foreclose on a member’s interest. The more members, more risk and if it goes public even more. The LLC can go into CH11 reorganize, and the court will in some cases allow assets to be kept allowing the business to run and not lay off employees, etc…It cost more, it is more difficult, the risk is higher for the banker, that is what I was told when I tired several anyway.
    Ali Boone
    Replied about 6 years ago
    That almost seems too good to be true Liam. If nothing else, when a mortgage is in an LLC’s name, it is still backed personally. I’d be curious how you’ve been able to avoid every complication and risk out there…
    colleen
    Replied about 6 years ago
    I echo Liam’s experience. I formed an LLC and the bank was fine with financing under it. It was not a SFH so the loan was commercial anyway. One of the other reasons for forming an LLC that I don’t see mentioned was that we have property in one state but live in another. Other then asset protection it is better from a holding standpoint. Probate is different if you have properties in multiple states. Forming an LLC in RI also has some state specific advantages.
    Ali Boone
    Replied about 6 years ago
    Colleen, yes commercial loans are completely different than residential. Commercial loans are designed to lend to entities. Can you elaborate on the point about the properties being in different states in terms of the benefit of the LLC?
    Bradley B. Clark
    Replied about 6 years ago
    Ali – I believe Colleen is referring to probate avoidance. If you own real estate in Texas and Oklahoma personally and you pass away your administrator will likely have to probate your estate in both states which can be very expensive. If the property is owned by an LLC, probate is avoided altogether.
    Ali Boone
    Replied about 6 years ago
    Cool. A factor I never would have thought to considered!
    Paula R. Investor from Truth Or Consequences, New Mexico
    Replied almost 4 years ago
    What if you add your share of the property (say, 50% held with a relative owning half) to your Revocable Living Trust, which is set up specifically to avoid probate? My sis lives in Cali and I and the potential purchase are in New Mexico and we are debating how to own the property for both liability shelter and to avoid probate as we are both in our 60s and it’ a buy and hold short-term (vacation) rental? Thanks!
    Terry P
    Replied about 6 years ago
    States like Delaware, Nevada and Wyoming can offer you various benefits above and beyond what your state can offer you. Delaware is considered a corporate tax haven and capitol for one. A long history of case laws allows for much more timely resolution, their legal infrastructure allows. It depends on your business model, you may still have to register in your own state and be foreign to another state and have a resident agent and local address, or you have to register as foreign with the Secretary of State and in some cases of rehabbing properties you will under heavy scrutiny by the Attorney General’s office due to consumer protection laws. I looked into long ago and there is no benefit for my local business that caters primary to local clients anyway. The fine line between tax avoidance and tax evasion is a road I did not want to chance.
    Michelle
    Replied about 6 years ago
    Great article and comments! I did form an LLC for my one rental but from time to time when I read comments like these I am conflicted about having done it. Both my PM and my RE attorney (who is also a family friend) recommended it. My cost to maintain it is only $50 per year here in Wyoming and with just the one it’s easy to keep the recordkeeping separate from my personal accounts so no great loss, I guess!
    Ali Boone
    Replied about 6 years ago
    $50/year sounds good to me, Michelle! Far beats the $800/year in Cali, that’s for sure.
    Kent
    Replied about 6 years ago
    I think it all really just comes down to which state you are in. I’m in NY and I know a lot of investors who say 1 for PM and 1 for each property. You can do it online for only $200 each.
    Ali Boone
    Replied about 6 years ago
    Just be careful Kent doing it online. The online setups are extremely generic and if your entity setup isn’t structured just right for investment properties, you could miss out on some major tax breaks.
    Kent
    Replied about 6 years ago
    I think it all really just comes down to which state you are in. I’m in NY and I know a lot of investors who say 1 for PM and 1 for each property. You can do it online for only $200 each.
    Kent
    Replied about 6 years ago
    I think it all really just comes down to which state you are in. I’m in NY and I know a lot of investors who say 1 for PM and 1 for each property. You can do it online for only $200 each. Reply Report comment
    Shaun
    Replied about 6 years ago
    Ali why would you have to pay the $800 fee to CA for the LLC? Usually you pay state fees in the state you set it up in and any state that it is registered to do business in (One reason getting the Delaware and Nevada et al LLCs isn’t that useful for owning rentals since you need to register it as a foreign entity in the state you own them). If you set up the LLC in Georgia and it is only doing business there then you should only be paying Georgia fees. Now without a doubt you would have to pay CA income tax on any money you make, but that is different.
    Jeffrey Hare
    Replied about 6 years ago
    The California Franchise Tax Board has recently changed the rules which define “doing business” in California. https://www.ftb.ca.gov/forms/misc/3556.pdf Here is an excerpt: You are considered to be “doing business” in California if: • It is a nonregistered foreign LLC that is a member of an LLC that does business in California. • It is a general partner in a partnership or limited partnership that does business in California. • Any of the LLC’s members, managers, or other agents conducts business in California on behalf of the LLC. The link above will take you to a document that includes examples. If you are a California resident and set up a Nevada LLC own property in Nevada, which hires a Nevada property management company, and you give directions to the management company and otherwise manage the LLC, you are considered to be “doing business” in California and mus file a California FTB Form 568.
    Shaun
    Replied about 6 years ago
    Ali why would you have to pay the $800 fee to CA for the LLC? Usually you pay state fees in the state you set it up in and any state that it is registered to do business in (One reason getting the Delaware and Nevada et al LLCs isn’t that useful for owning rentals since you need to register it as a foreign entity in the state you own them). If you set up the LLC in Georgia and it is only doing business there then you should only be paying Georgia fees. Now without a doubt you would have to pay CA income tax on any money you make, but that is different. Reply Report comment
    Terry P
    Replied about 6 years ago
    I think you are drastically missing the point of an LLC is your main concern is registration fees and in some cases taxes . The reason over half of the fortune 500 companies register in Nevada, Delaware, Wyoming, is because of the corporate legal structure, DE gave birth to LLCS I read, lack of juries, making it very, very, difficult to pierce the corporate veil which if done could cost you thousands or in some case millions in assets. Other thing I am hearing is if a foreign entity owns property these states will revert it back to the jurisdiction it resides in, although I am thinking that probably depends on the law suit and what it is for. I am sure many of those 500 companies hold real property assets in their foreign LLCs, I’m just not smart enough to figure out how YET! 🙂 Well at least I admit when it’s over my head, 😉 , From what I can tell the local tax is not that bad here, and there is no state income tax or self employment tax in those states.Again, that is second to the asset protection there. I grew up in Cali the out-liar state of them all, but sounds like some of the same rules apply here it must be spreading like a plague, politics!
    Randy Mitchelson
    Replied about 6 years ago
    I have a client with 12 investment properties, all of which have positive cash flow. They have a mortgage on most of the properties. Obviously, with that many mortgages they have hit a ceiling with typical lenders. What options are available to investors to acquire and finance more properties? Do they have to work with a commercial lender now or what?
    Ali Boone
    Replied about 6 years ago
    I can’t speak for the commercial side Randy, but that is a bit of a big question for a lot of investors. How to finance if you can’t get a mortgage. Private financing, investor partners, paying all cash, loans from other sources, bundling and trying for commercial or blanket loans, etc. I know I’ve seen a lot of forum conversations that talk about this and I believe Brandon Turner has a blog or two that hits some of the options.
    Pete
    Replied about 6 years ago
    Ali, I really like this article because I too was really looking into the LLC thing as so many books and gurus advised it. When I looked at all the pros and cons, I realized that an umbrella policy offered me financial protection that was easier and cheaper. Beyond that, there are cases where the LLC did offer protection because they were not recognized and in other cases thrown out because they weren’t managed completely separate. On top of that, there are not enough cases to prove the protection a LLC will hold.
    Ali Boone
    Replied about 6 years ago
    Agreed Pete! Thanks for writing in.
    Jon Rosser
    Replied almost 6 years ago
    Very helpful article, good to hear from someone that has experience of rentals that already have mortgages on them. I’m moving in the spring and plan to rent out current home. Deeding over the house into an LLC makes me nervous with the bank technically being able to call the loan due. Since you do not have an LLC, how dos that affect your accounting for it? I just got introduced to a CPA but most of our discussions were around using an LLC. If I don’t use an LLC, would you set up some time of sole proprietorship? I want to have separate bank account to keep everything in order, just curious how it works if you don’t have an LLC. Thanks!
    Ali
    Replied almost 6 years ago
    Good question Jon, and sorry I’m just now getting back to you about it…somehow I didn’t see it come in! I keep it all under my personal name still and I keep track of all of the expenses and income for each house. All of the deductions are then just taken from your personal taxes, just like any write-off. The only difference, as far as tax accounting, if you have an LLC or no-LLC is when the deductions essentially happen. If you have an LLC, all of the expenses are deducted before your total taxable income is calculated. If no LLC, then your total taxable income, including income from the properties, is calculated and then you write-off all the expenses. Both ways produce the exact same outcome, so it doesn’t matter. Some people like to have everything completely separate just for organization, but if it’s all mixed in with your personal stuff there is nothing wrong with that at all. I’ve always had an Excel spreadsheet to track my expenses that I know I’ll be able to write off, and I also created a travel log. Then I add the expenses from travel plus the other expenses together and that’s what you’ll write off. I always send that full sheet to my accountants and they never have a problem. Hope that helps!
    Jason
    Replied almost 6 years ago
    We have two rentals-Condos in California. We plan on selling one but are concerned about the capital gains effecting our status with Obamacare. If we transfer the title to a LLC or some other corporation, can we personally avoid the capital gains? I know the Corporation will have to pay, I guess. How would it all pencil out? It is all so confusing Thank you, Jason
    Liam Goble
    Replied almost 6 years ago
    Jason, LLCs are set up as a ‘pass through’ tax entity, so any profits are only taxed once, when they arrive on your tax return. If you have losses in an LLC, any profits from a sale would be offset by the losses and the net amount would get reported on your taxes.
    Ali
    Replied almost 6 years ago
    Good question Jason, and unfortunately I don’t have an answer for it. I’ve never sold a property so have no knowledge on that side of things. I think your question needs to be asked to an experienced CPA who deals with real estate a good bit. I think they will be the only ones who can give you accurate advice, plus they would know your current income and such to know how it will be affected with Obamacare and such.
    david zion
    Replied almost 6 years ago
    What if one can’t get an umbrella policy b/c there is no mortgage on personal housing or auto insurance, which is generally how umbrella’s are formed? Is there other insurance policies available that provide asset protection without going with an LLC?
    Ali
    Replied almost 6 years ago
    Not that I know of David, but that doesn’t mean there isn’t one. Not sure I understand though about the lack of mortgage or auto insurance. I don’t know that either of those are required to get an umbrella policy? Maybe, but I’ve never been told that. I recently heard that a lot of companies require you to have your homeowner’s insurance policy through them in order to issue the umbrella. That’s the only thing I’ve heard of.
    jose R
    Replied almost 6 years ago
    Hello, I have obtain a great deal on an multy family income property and have owned it for a couple of years. Now I am looking to grow within the Real Estate business and possibly aquire more properties to rent and possibly flip and sell. Based on your achievements what would you suggest would be the safest and easiest route to take, if I want to form an entity with the goal of obtaining financing for mutliple properties and possibly some sort of tax break. Thanks,
    Ali Boone
    Replied almost 6 years ago
    Jose, it depends on how you want to obtain the financing. If you want individual mortgages, an LLC will make it harder to get financing. If you want a lot of properties, you would need to look and see if you can find a commercial umbrella loan of some sort and see if they can lend to LLCs. I don’t know enough about that route to advise on how to do it or where to find one of those. The tax breaks you don’t need to worry about as much… you can get the same tax breaks (just in reverse order) whether the properties are in an LLC or not.
    Mike
    Replied almost 6 years ago
    I own 10 rental properties without any mortgages, and I have been debating the LLC / umbrella policy for a couple of years now. When I attempted to get an umbrella policy and read the fine print, it was basically a $$ extension of my primary policy on the properties, with a ton of extra exclusions. I can’t recall them all now, but it was enough for me to not pay the extra money since it did not cover all the things that I thought was appropriate. My real estate lawyer said that an LLC would not protect me from lawsuits in the state of Virginia. Is the truth out there anywhere? Has anyone with an LLC been sued? Can you share your experience and recommendations? Has anyone with an umbrella policy been sued and actually used it? Can you share your experience and recommendations?
    Ali Boone
    Replied almost 6 years ago
    Great question Mike! I’m curious for any respondents….
    Tony Tran
    Replied almost 6 years ago
    Ali, I’ve talked to my CA attorney and the answer received is the entity “doing business in CA” will be subject to CA franchise tax. She stated that if there is no connection at all between the foreign entity to the state of CA, you will NOT be subject to CA franchise tax. To avoid the issue, your LLC location, your bank account, property management, etc. MUST be in the foreign state. Nothing linking the entity to CA. Note: Please don’t quote me on this. If you need advise, consult your CPA and attorney. Thank you, Tony
    Ali
    Replied over 5 years ago
    Interesting Tony. I was told the opposite. The reason they would get me for the CA tax is because I am a California resident, so there would be “no way” (theory) that I could avoid working on it from CA, and because I’d be “doing business in CA”, they would charge the tax. I was told the only way to avoid the tax would be if I “wasn’t a CA resident”, which would mean I’d have to change my driver’s license, car registration, etc. The reason my location would matter is because I would be the owner of the LLC. You’re the first person to say they were advised they wouldn’t have to pay the tax. Your person may be right, but I would definitely get a second opinion first. If you do get a second one and they say the same thing, definitely let me know.
    Jeffrey Hare
    Replied over 5 years ago
    Ali I think both you and Tony are correct, but your respective descriptions are different. Tony does not say he is a California resident, if he was, there would be a “connection” between his LLC and California, and the advice he received might be subject to further analysis and interpretation by the Franchise Tax Board. The FTB does not address the issue where a California resident is merely a passive Member of a foreign (out of state) LLC that does no business in California, has no bank accounts in California, and the Member’s only connection is to get a distribution – if there is one. In your example, you are a California resident, you “own” the LLC, and possibly make decisions concerning the LLC. The FTB has made it clear that they consider this to be “doing business” and would require you to file a Form 568. Again, you’ll need to consult with your own tax and legal advisor, and keep in mind that this is relatively new and has not been fleshed out by a lot of decisions.
    Ali
    Replied over 5 years ago
    Tony, I’m assuming you are a CA resident which is why you looked into it?
    Tony Tran
    Replied almost 6 years ago
    Ali, I’ve talked to my CA attorney and the answer received is the entity “doing business in CA” will be subject to CA franchise tax. She stated that if there is no connection at all between the foreign entity to the state of CA, you will NOT be subject to CA franchise tax. To avoid the issue, your LLC location, your bank account, property management, etc. MUST be in the foreign state. Nothing linking the entity to CA. Note: Please don’t quote me on this. If you need advise, consult your CPA and attorney. Thank you, Tony Reply Report comment
    Gary
    Replied over 5 years ago
    Should you have seperate bank accounts for each rental property you own, what are the recommendations?
    Ali
    Replied over 5 years ago
    You certainly don’t have to Gary. That is up to you. If you want to keep all the finances separate, it would help in doing that for sure. If you don’t though, there is no harm in combining them.
    Christy B
    Replied over 5 years ago
    Hi. My sister and I formed an LLC for commercial property that we inherited. There are three structures on the land. One is being rented by a company. The other two are; the family home and a mobile home. My problem here is that my sister asked to live in the family home and does not pay rent. I agreed to this during a moment of weakness when my mother passed. I pay half the property tax on the land and she pays the other half. How can I prevent her children from taking over this Home which is in the LLC bringing no profit to myself or my children when they inherit this property? I wanted the LLC to benefit tax wise from this land and to protect my personal assists. The home has a pool and her children and guests ride four-wheelers all over the property. One guest has broken an ankle, but not sued. I am so stressed with paying property tax and only receiving 1/2 income from the rental building and no profit from the home. I am wondering what I can state in the LLC that would prevent her children from just using the property in the same manner without my say or (if I die) my children to whom the 50 percent interest would pass. Thank you, Christy
    Ali
    Replied over 5 years ago
    Hmmm Christy, that is a tough situation. And an important one! There is a lot of liability going on, a lot of potential family mess confusion, and a strain on the income. I wish I could give you exact advice, but I would definitely talk to an entity lawyer on this one. This one sounds serious enough where you want to absolutely make sure all points are covered properly, and I think only a lawyer can do that. But look for one, maybe a referral for other people? Don’t just go with any random lawyer. Maybe ask in the BP forums for recommendations? It sounds like you are losing out with your sister living in that house. If you are paying 50% of the taxes, as is she, but she is getting the benefit of living free there, sounds like that isn’t a fair split. I’d think you should be paying less in taxes, or collecting rent from her. Or better yet, whatever the property would be bringing in, split that in half and her pay that amount in rent each month. Because you are losing out on income by letting her live there and she’s making out like a bandit by living there for free. Just my thoughts.
    Ali
    Replied over 5 years ago
    Hmmm Christy, that is a tough situation. And an important one! There is a lot of liability going on, a lot of potential family mess confusion, and a strain on the income. I wish I could give you exact advice, but I would definitely talk to an entity lawyer on this one. This one sounds serious enough where you want to absolutely make sure all points are covered properly, and I think only a lawyer can do that. But look for one, maybe a referral for other people? Don’t just go with any random lawyer. Maybe ask in the BP forums for recommendations? It sounds like you are losing out with your sister living in that house. If you are paying 50% of the taxes, as is she, but she is getting the benefit of living free there, sounds like that isn’t a fair split. I’d think you should be paying less in taxes, or collecting rent from her. Or better yet, whatever the property would be bringing in, split that in half and her pay that amount in rent each month. Because you are losing out on income by letting her live there and she’s making out like a bandit by living there for free. Just my thoughts.
    Pamela
    Replied over 5 years ago
    I have a residential property that’s free and clear and will be working on property myself with lots of other contractors, carpenters, etc, and I’m concerned about liability due to possible injuries. Would you advise the umbrella ins for that concern? Also, I want to sell the property inside a year of the purchase, so to avoid capital gains from a potential large profit, and I’m told I should pay myself through the LLC, monthly, and leave remaining amt of profit in the LLC for future acquisitions. If I DON’T have an LLC, would the profit be taxed at capital gain’s rate no matter if I re-invested the money in another property quickly? So confused. Thanks for any assist!!!!
    Joel Corley Investor from Mc Lean, Virginia
    Replied over 4 years ago
    If you sell the property, then you would first have to recapture the depreciation you have taken with the property at a 25% rate. Note that this rate does not depend on your tax bracket, it’s the same for everyone. Then you would pay any capital gains taxes and medicare taxes. Example. Property purchased in 1990 at $200K with $125K depreciation, sold for $400K. Recapture = $125K * 25% = $31,250 Capital gains = ($400K – $200K) * 15% = $30,000 Medicare taxes = ($400K – $200K) * 3.8% = $7,600 A better way to do this is do a 1031 exchange. This is also known as a like-kind or Starker exchange. Essentially what you do is transfer the the entire cost basis from the old property to the new property or properties and defer any taxation. Also under current tax law, if you defer selling until it passes to your estate, the property will be stepped up to the current fair market value and no taxes will ever be paid. This could change to having your heirs inherit the property. The trade off is that you really need to deal with companies who specialize in this; this is not a DYI thing at all. There are tons of restrictions and gotchas 1031 exchanges and the IRS is quite strict on meeting all the rules. Sources: IRS Residential Renal Property: http://www.irs.gov/pub/irs-pdf/p527.pdf Ten Things to Know About 1031 Exchanges http://www.forbes.com/2010/01/26/capital-gains-tax-1031-vacation-home-personal-finance-robert-wood.html Unearned income taxes http://health.burgess.house.gov/uploadedfiles/one_page_on_unearned_medicare_tax.pdf
    Ali
    Replied over 5 years ago
    Hi Pamela. Thanks for writing! As for the contractors, that liability all needs to be handled under their own insurance. Any contractor or repair guy or whoever ever works on your property should always have their own insurance. As for the selling and capital gains and such, you’ll really need to talk to a CPA about that, and preferably one who specializes in real estate investing so they can tell you exactly how that will play out. I’ve never sold a property so I don’t know much of anything about dealing with capital gains and such, and I don’t have the LLC either so can’t speak to that. Definitely only get advice from a professional on this one as doing it the wrong way could cost quite a bit of money. Good luck!
    Tony
    Replied over 5 years ago
    Just curious Ali, what company did you with for your Umbrella Insurance? Would you make any recommendations?
    Ali Boone
    Replied over 5 years ago
    Tony, I use USAA and highly recommend them (for everything, I use them for banking, insurance, etc) but you have to have military ties to get in with them unfortunately.
    Avi
    Replied over 5 years ago
    Fantastic thread Ali!! Thank you for starting it and thanks to all the contributors for their input. This has turned out to be quite an educational night for me!! I am new to this game, so its all a little overwhelming. Have a condo that I owned and lived in for several years while I was in training…..i am now done and bought a nice house which I love, leaving the condo sitting empty. I’ve been on the leasing list for 6+ years and am still not high enough to be “awarded” a leasing permit by the HOA to rent out the unit. I finally reached a point where I was tired of just throwing money down the toilet on the property and had decided to sell it when someone mentioned the idea of forming an LLC and transferring ownership to the LLC as a means of getting around the “leasing permit” issue. In fact, it was the property manager for the building that suggested it to me. Has anyone ever had any experience with this sort of thing? Now that I know this is an option, I am seriously considering keeping the place, forming the LLC and using it as a rental property. Your thread has really helped me educate myself about the whole process and feel much more comfortable about possibly going this route…..so thank you all for your contributions! Another question: the property manager gave me the contact info of an attorney that has done this process for other people in the past (I will be contacting him tomorrow), but the cost he quotes on his pamphlet is $2500. This seems a little steep to me for setting up the LLC and arranging things. I would never dream of doing all this on my own, and certainly would hire an attorney to do it, but from everything I have read online about this process, it doesnt seem like it should cost that much. Anyone have any thoughts or previous experiences similar to this? Thanks!
    Avi
    Replied over 5 years ago
    Fantastic thread Ali!! Thank you for starting it and thanks to all the contributors for their input. This has turned out to be quite an educational night for me!! I am new to this game, so its all a little overwhelming. Have a condo that I owned and lived in for several years while I was in training…..i am now done and bought a nice house which I love, leaving the condo sitting empty. I’ve been on the leasing list for 6+ years and am still not high enough to be “awarded” a leasing permit by the HOA to rent out the unit. I finally reached a point where I was tired of just throwing money down the toilet on the property and had decided to sell it when someone mentioned the idea of forming an LLC and transferring ownership to the LLC as a means of getting around the “leasing permit” issue. In fact, it was the property manager for the building that suggested it to me. Has anyone ever had any experience with this sort of thing? Now that I know this is an option, I am seriously considering keeping the place, forming the LLC and using it as a rental property. Your thread has really helped me educate myself about the whole process and feel much more comfortable about possibly going this route…..so thank you all for your contributions! Another question: the property manager gave me the contact info of an attorney that has done this process for other people in the past (I will be contacting him tomorrow), but the cost he quotes on his pamphlet is $2500. This seems a little steep to me for setting up the LLC and arranging things. I would never dream of doing all this on my own, and certainly would hire an attorney to do it, but from everything I have read online about this process, it doesnt seem like it should cost that much. Anyone have any thoughts or previous experiences similar to this? Thanks!
    Ali Boone
    Replied over 5 years ago
    I won’t be able to help much Avi as I don’t have experience with any of this, but why would the LLC allow you to avoid the wait for trying to lease? Is that just per the HOA or is that a real thing? I’ve never heard of that but I have no experience with condos either, sorry. Just make sure that if you do end up leasing it out that you will actually profit. Usually condos’ association fees and other expenses knock out any cash flow you would receive. If you won’t profit each month from the cash flow if you rent it, it’s definitely not worth paying the $2500.
    Avi
    Replied over 5 years ago
    I was suspicious of this initially as well, and while I don’t have independent confirmation of this fact, the property manager at my building is the one who introduced me to this idea. She said there is a loophole in the HOA by-laws that would allow me to convert the unit over to an LLC and designate any tenants as “beneficiaries” who just happen to live there. By doing it this way, It gets me around the leasing permit issue, or so that’s how she explained it. Obviously I need to gather more info and will speak to the attorney tomorrow for more details, but I was just curious if anyone else had ever utilized this “trick” before. Right now I would stand to make at least $500 per month in rental income after the mortgage and HOA fees are taken care of, if I was able to rent it out based on the rental market here in Atlanta; this is the only reason I am even considering it, but $2500 is a bit of a deterrent.
    Avi
    Replied over 5 years ago
    I was suspicious of this initially as well, and while I don’t have independent confirmation of this fact, the property manager at my building is the one who introduced me to this idea. She said there is a loophole in the HOA by-laws that would allow me to convert the unit over to an LLC and designate any tenants as “beneficiaries” who just happen to live there. By doing it this way, It gets me around the leasing permit issue, or so that’s how she explained it. Obviously I need to gather more info and will speak to the attorney tomorrow for more details, but I was just curious if anyone else had ever utilized this “trick” before. Right now I would stand to make at least $500 per month in rental income after the mortgage and HOA fees are taken care of, if I was able to rent it out based on the rental market here in Atlanta; this is the only reason I am even considering it, but $2500 is a bit of a deterrent.
    Ali
    Replied over 5 years ago
    The cash flow definitely sounds good. What is that $2500 for exactly? You can technically set up a plain ‘ole LLC for way cheaper than that, even if you do it the expensive way. And do you have a mortgage out on the condo? Moving it to the LLC can trigger the due on sale clause.
    Candace Norvell
    Replied over 5 years ago
    In the process of having rental property in Florida deeded over to me. The trust has been using a property management company to oversee and collect rent for all of our properties. I am expected to receive a duplex with four apartments and three houses. None of these have been insured while in the hands of the property management company whom I assume is a LLC. And the reason I don’t know for sure is that my sister has been the executor of my mom’s trust and I have not been privy to such issues. Basically as the baby of the family I was to be seen and not heard. My question is it seems as if perhaps they are costly to insure and many are not in good condition, but I believe they are pretty solid structurally. I am in Colorado and haven’t been home to view said properties. What if I can’t get insurance or its unbelievably high (due to hurricanes, etc) should I put it in an LLC? I want to be covered if a tenant gets hurt in one of my properties or will the PM company take that liability in their LLC? The reason the PM agreed to take on the properties uninsured is I believe my sister worked out a first to list first to sell etc… agreement with them. But they have been willing to do the management without insurance. I May keep them on if they are willing to continue to manage mine uninsured. Does that mean that if they do I won’t be sued as long as I have them continue to manage them, and they take that on through their LLC? Super confused and am going to eventually set it up in a trust for my grandchildren but need help! Thanks Candy
    Ali
    Replied over 5 years ago
    Hi Candy, I’m not sure I can help for sure on this one as I don’t completely understand how any of that is working. All I can think of though is that I would never be comfortable if I owned a property that is uninsured (and not sure it’s legal?). I also don’t think that putting it in an LLC allows you an escape from having to have insurance on it (LLC asset protection deals more with liability, not general like fires and such). I would say you need to insure it. If it’s that high and the building isn’t profitable, I would say sell it and if you want the grandkids to benefit, put that money in a trust for them. OR, better yet since you would get taxed on the income, 1031 exchange the properties into other properties that actually do profit. Not sure I helped? I don’t think having that PM company as any part of it is a good idea if it’s in your name. Need insurance.
    Jeffrey Hare
    Replied over 5 years ago
    Candy, your next action item should be to consult with an estate planning attorney. You indicate that you are about to receive what sounds like a distribution from a trust, and you mention you want to continue to keep the assets in a trust for the benefit of your grandchildren. This seems to indicate that you are or will be acting the position of a Trustee of the Trust. If so – this is IMPORTANT – you will be subject to very strict and well-established rules and responsibilities which are often referred to generally as your “fiduciary duties.” This includes accounting and reporting requirements, and making certain that the property(ies) are correctly managed, insured, maintained, etc., and you could be held personally liable for any damages for your failure to fulfill your fiduciary duties. Whether you form a LLC or purchase hazard insurance or hire a PM company is all secondary to fulfilling your role as a Trustee. Many individuals who suddenly find themselves in the position of being a Trustee or Successor Trustee have no clue what their duties and responsibilities are. There are several excellent articles and blogs (like this one) on this topic.
    wendy
    Replied about 5 years ago
    Check with the insurance company because we are told that citizens (insurer in florida) will not insure properties titled in an LLC.
    wendy
    Replied about 5 years ago
    Check with the insurance company because we are told that citizens (insurer in florida) will not insure properties titled in an LLC.
    Yolanda
    Replied over 5 years ago
    Thank you for the great article and keeping the conversation going. It’s been very educational for me!
    Ali
    Replied over 5 years ago
    Great to hear Yolanda! Thanks for commenting.
    nalo
    Replied over 5 years ago
    I spent the last 2hrs reading all the comments. Great education, and it was free!. I am a “Keep it simple” person, but I also want to do things the right way from the beginning. So instead of just buying a rental property in my name, I too had formed several LLCs (one under another) with the hopes of acquiring properties under the LLCs, and for asset protection, etc. The info share here has been really great to say the least. So my active LLC is a property mgmt which is up and running effectively. My other LLC was established to purchased the rental properties. However, going this route means borrowing at a higher interst rate and putting more money down. To have the property deeded in the LLC, but the mortgage in my name kinda defeats the purpose of asset protection. As mentioned, if they want to find you, they will. (not that I have anything to hide). I think I may just go the regular route and acquire rental properties in my personal name, manage it throught my property mgmt company and just make sure I have adequate insurance. In the future I will want to deed the properties over into a trust for estate planning purposes for my kids. Does this sound, sound?
    Bradley B. Clark
    Replied about 5 years ago
    Nalo: The downside to your future approach is the risk of a judgment not covered by insurance or where there is a judgment in excess of insurance. As far as your current structure: it sounds to burdensome and expensive. The series LLC (if it’s available in your state) might be the better option for you. Bradley
    nalo
    Replied about 5 years ago
    @bradley, do you know if NC has series LLCs?
    Bradley B. Clark (@bradleybclark)
    Replied about 5 years ago
    I don’t believe NY has adopted a series LLC statute yet. You may, however, be able to form a series LLC in Delaware, for example, and register it to do business in NY if NY allows that (and that I unfortunately do not have the answer for but you can probably call the NY secretary of state and ask).
    Ali Boone
    Replied over 5 years ago
    Haha Nalo, it does sound sound! Yes, I think it’s perfect and exactly the reasons you mention are huge arguments against forming LLCs for rentals (quantity-dependent sometimes, arguably). They are just complications people don’t realize can come with going the LLC route and more so when the LLC route doesn’t offer 100% security anyway. I’m glad you shared your experience because it puts into light the repercussions of forming the LLC. Which isn’t bad for everyone, but people in similar situations to you can get a lot from what you said. So thank you!
    Marlow M. Taylor
    Replied over 5 years ago
    Great post Ali! I have four properties and was looking into LLC as an option. Once you mentioned umbrella insurance as your option I felt I was good because that’s the route I took. Thanks for relevant information.
    Ali Boone
    Replied over 5 years ago
    You’re welcome Marlow!
    Marlow M. Taylor
    Replied over 5 years ago
    Great post Ali! I have four properties and was looking into LLC as an option. Once you mentioned umbrella insurance as your option I felt I was good because that’s the route I took. Thanks for relevant information. Reply Report comment
    Scott Arno
    Replied over 5 years ago
    This is an amazing read! I’ve learned a ton from the article and from the comments. I too am trying to decide which route will be better for me with buy and hold properties and agree this issue should be analyzed on a cost vs. benefit analysis which in my mind boils down to a state by state decision. However, I do have an insurance question. Here’s a hypothetical scenario: An LLC company is holding 4 properties, each with property insurance, and the LLC has the necessary liability and worker’s comp insurance. The owner also has an umbrella policy. The LLC company was sued and the veil was pierced. Because the veil was pierced, does this negate all property insurance on the rentals and LLC liability insurance and fall straight on the owners umbrella policy because the business and the person were considered one in the same? I ask this because I wanted to know if the layers of insurance would be different in a SP vs. a pierced veil LLC suit. Thanks Scott
    Ali
    Replied over 5 years ago
    Scott, definitely check with professionals to confirm the answer. You don’t want to get mixed info on that and then end up in trouble. Thanks for commenting!
    Bradley B. Clark
    Replied about 5 years ago
    Scott: In Texas, it is now practically impossible to pierce the corporate veil unless you can prove fraud. Bradley
    Jeffrey Hare
    Replied over 5 years ago
    Scott, my first question here would be to find out why the veil was pierced. My second question would be who or what was covered under the insurance policy. The hypothetical you describe assumes that something fairly unusual and drastic occurred that resulted in a court ruling that the LLC was merely an alter ego of the individual owner, and to get to that point in the legal process would require a substantial amount of time, money, and perhaps even a trial. If the entity was insured, it would be the responsibility of the insurance company to at least provide a defense to the policyholder, which in most cases results in an early settlement. If the act or omission that triggered the action in the first place was something that was not covered or was excepted under the policy (such as a deliberate or grossly negligent act), the insurance company may provide a defense, but no coverage. It is also this type of act or omission (among others) that may trigger the effort to pierce the veil of the LLC. This type of hypothetical, by the way, helps promote elaborate and expensive asset protection schemes, but in reality they rarely occur.
    Ali
    Replied over 5 years ago
    Scott, definitely check with professionals to confirm the answer. You don’t want to get mixed info on that and then end up in trouble. Thanks for commenting! Reply Report comment
    Cory
    Replied over 5 years ago
    Often see limited liability companies such as, but not many, I know today read a lot of content also give I added a lot of shortcomings, I will continue to learn.
    Thomas
    Replied about 5 years ago
    I’ve opted so far to forego an LLC and carry umbrella policy for $2m. But when I did the research on LLCs insurances and lenders said they wouldn’t have a problem with LLC. I was advised by attorneys to hold all properties in living trust and have LLC has beneficiary of said trust, for best asset protection and estate planning. Also, I haven’t seen this mentioned, but CPAs like RE LLC for cost that are not connected to any single property. I.E. cost of looking for new properties which could involve travel, can be written off as a general loss by the LLC, whereas it couldn’t be “connected” to any existing property. I can think of many thinks that apply, such as mailbox services, attorney fees, umbrella insurance, computer and office cost etc. -Thomas
    Ali Boone
    Replied about 5 years ago
    Great input Thomas, thank you. Yes, you bring up great points on all. What triggered you to stick with the umbrella insurance rather than the LLC or living trust if your research said it wouldn’t be a problem?
    Thomas
    Replied about 5 years ago
    While it wouldn’t be a problem, there’s not all that much to gain from it. Liability protection in a single member LLC is far from guaranteed; all of the properties are financed, so at this point the asset exposure is the bank’s, not mine anyway; there are no other tax savings except the “catch-all” non-attributable expenses which aren’t very high at this point; the paperwork requirements for a LLC are substantial, and the cost of starting the LLC and porting properties into the trust/LLC setup play a part as well. As I move to commercial loans I will get input from commercial lenders as to whether they prefer LLCs. But it seems like I can get 30fix for another dozen properties or so, hence I don’t see the need to go for c-loans yet. I’m also looking at international property, so the LLC expenses deduction becomes more and more interesting. A trip to Italy is easily $5,000 which I couldn’t to any of the existing properties. I guess I don’t think asset or liability protection is the reason to get an LLC as a single member/owner. If you do something bad, you’re going to be held liable either way. With biz partners, it’s a different story as you don’t want to be held responsible for their actions.
    Bradley B. Clark
    Replied about 5 years ago
    Thomas: Just don’t get a judgment against you while you have any equity in any of your properties; otherwise, you will wish you had them in a LLC or, better yet, a series LLC. Bradley
    Bradley B. Clark
    Replied about 5 years ago
    Thomas: Just don’t get a judgment against you (for which insurance doesn’t apply) while you have any equity in any of your properties; otherwise, you will wish you had them in a LLC or, better yet, a series LLC. Bradley
    Thomas
    Replied about 5 years ago
    Bradley, it wouldn’t let me reply directly to you. I’m no expert, and this might be off, but from what my lawyers tell me, it doesn’t matter. You’ll own the LLC, so that is an asset that a lien can be put against. The LLC really only protects against negligence from business partners in the same LLC, and your share of the LLC from claims against them. If you are negligent as a private person all your assets are on the line, and your ownership in the LLC is one. Vice versa, if someone sues the LLC and you actually were negligent and it’s single member, then the judges here in CA have caselaw that pierces the veil and still hold you personally liable. Just like a Corp which limits the liability of the stockholders, the person making the decisions for the corp (CEO, Prez, any officer) is still liable for his actions. The same applies to LLC, members are not necessarily liable, but if they are actively involved in decisions they become liable. That said, it definitely serves as a higher barrier to sue, cuz of legal cost for plaintiffs etc. In a small claims court, i.e., the veil would never be pierced. Againm this is only my understanding based on research and conversations with attorneys. What do they know!
    Bradley B. Clark
    Replied about 5 years ago
    Thomas: D&O insurance will help protect the officers and directors of the company (but that’s yet another expense to mounting expenses). In Texas, our Business Organizations Code (“BOC”) specifically provides that “[e]xcept as and to the extent the company agreement specifically provides otherwise, a member of manager is not liable for a debt, obligation, or liability under a judgment, decree, or order of a court.” BOC sec. 101.114. Texas law makes it VERY clear that even a court order or a judgment isn’t going to touch you personally as a member or manager of the company (as long as your company agreement doesn’t say otherwise). But Texas law goes even further. The BOC also provides that an owner can’t be held liable under an “alter ego” theory (BOC sec. 21.223(a)(2)), actual or constructive fraud (same), a sham to perpetrate a fraud (same), “any other similar theory” (same), or the failure to follow corporate formalities (BOC sec. 21.223(a)(3)). HOWEVER, BOC 21.223 does permit “piercing the corporate veil” only when it is demonstrated that the owner “caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee [e.g., a creditor of the company] primarily for the direct personal benefit of the owner.” While it may be easy to get personal liability on an owner of an LLC in California it is very, very hard to do so here in Texas. All the common law supporting piercing the corporate veil was swept away by the Texas legislature (and the Texas Supreme Court has consistently upheld this statutory framework). Take care, Bradley
    Faran Gouldson
    Replied about 5 years ago
    I have always put my rental properties in a separate LLC for each property. The reason I do this is because of the liability risk that comes with owning rental properties. If you own a rental property in your own name and someone decides to sue you for injuries or a loss resulting from that rental property. That lawsuit can not only affect your rental property, but your personal assets as well. If you have your rental property in a LLC with a separate checking account, then there is a better chance only that rental property will be affected by a lawsuit.
    Ali Boone
    Replied about 5 years ago
    That’s true Faran, but an umbrella insurance policy can give you the same protection and it’s a lot cheaper than an LLC (especially multiple LLCs!). And it’s not a 100% guarantee than an LLC will protect you. Nothing wrong with going the LLC route if that’s your preference, but everyone should know it’s not the only route.
    Ali Boone
    Replied about 5 years ago
    That’s true Faran, but an umbrella insurance policy can give you the same protection and it’s a lot cheaper than an LLC (especially multiple LLCs!). And it’s not a 100% guarantee than an LLC will protect you. Nothing wrong with going the LLC route if that’s your preference, but everyone should know it’s not the only route.
    Ali Boone
    Replied about 5 years ago
    That’s true Faran, but an umbrella insurance policy can give you the same protection and it’s a lot cheaper than an LLC (especially multiple LLCs!). And it’s not a 100% guarantee than an LLC will protect you. Nothing wrong with going the LLC route if that’s your preference, but everyone should know it’s not the only route. Reply Report comment
    Sofia
    Replied about 5 years ago
    I have one that goes along with this but I still can’t figure out the good and the bad. So I have a friend purchasing a condo, he is from another country and this will be an all cash purchase. What’s the advantage and disadvantage of the LLC in this case?
    Ali Boone
    Replied about 5 years ago
    Sofia, definitely in that case the investor needs an entity. If he is an international buyer, he has to have one as a way to have a US account. It may be an LLC or it may be something else, depends on the country. An international buyer should never buy here unless they’ve talked to a specialist about what structuring they need, because if it’s done wrong, there could be severe tax consequences and lack of protection. Totally different story than US buyers.
    Juan
    Replied about 5 years ago
    Ali: My family in South America want to invest here. I looked at alternatives ways and i am thinking of the following Get their money as a family loan paying IRS published interest rates and witholding the 30 or 35% % as requiered Puting the proprties at my name with a 1mm umbrella policy Documenting the loan so in case of my death they can recover the investment without the state tax of 40% for non resident aliens. What am i missing?
    Ali Boone
    Replied about 5 years ago
    Juan, all of that is possible. Most of it will depend on the details of the setup. I would speak with a professional regarding it all and confirm it will all work as planned.
    Ali Boone
    Replied about 5 years ago
    Juan, all of that is possible. Most of it will depend on the details of the setup. I would speak with a professional regarding it all and confirm it will all work as planned. Reply Report comment
    Ali Boone
    Replied about 5 years ago
    Juan, all of that is possible. Most of it will depend on the details of the setup. I would speak with a professional regarding it all and confirm it will all work as planned. Reply Report comment
    Howard
    Replied about 5 years ago
    Thoughtful article w/ a boatload of useful comments and wise responses. I’m an “accidental” remote landlord (hung on to former Oregon residences as rentals) not keen to pay setup costs and then $800/yr to state of for what seems way more complicated and a bit more expensive protection than my $2 million umbrella liability policy. That policy, setting a pretty high bar to qualify tenants, a lease that requires tenants to have renters insurance, a reliable handyman, and a living trust set up in part to keep the properties out of probate together add up in my small brain to something better than LLC.
    Ali Boone
    Replied about 5 years ago
    Haha Howard. Well I wouldn’t call that having a small brain because that is excellent thinking in how to set that up! And I agree.
    Ali Boone
    Replied about 5 years ago
    Haha Howard. Well I wouldn’t call that having a small brain because that is excellent thinking in how to set that up! And I agree.
    Ron
    Replied about 5 years ago
    Great discussion. I’m in the same boat. My lawyer recommended each property in an LLC, but my insurance agent told me that I would need a separate commercial liability policy for each (assuming I want extra liability like I do today). This will cost me much much more, and basically is a deal killer for me. i.e. to get 1M liability for each property, I would need to spend $650 per policy. Today I spend $179 per property for 1M liability. So I’m thinking to combine properties in one LLC, and have one LLC per state where I have properties. Just to protect against the extremely unlikely scenario of a judgement that either exceeds or is not covered by my insurer. Seems highly unlikely, especially, as I don’t manage my own properties. My lawyer recommended single member LLCs, owned by a master LLC which is muli-menber (myself and wife or our trusts). I’m a bit concerned that people said Florida single member LLCs weren’t that good, since that is what I would have, although the single member is a holding LLC which is multi-member. I’m also concerned about filing a tax return for the holding LLC using F-1120. Anyone do that on their own?
    Ali Boone
    Replied about 5 years ago
    Ron, have you talked to an entity specialist about all of this? Something in there sounds off. I think it would be worth it to talk to a couple different people (ones who also know the tax side of it too) as I think there may be alternatives to that solution.
    Mary Vanderford
    Replied about 5 years ago
    I live in Florida and me and my two brothers inherited my mom and dads house. Because of the way the real estate market is right now we decided to rent it out instead of selling it. It’s just one property and me and my two brothers. Our main goal was to rent it out to keep it occupied, until we decided to sell it. We have rented it out for one year now and have $300k of liability coverage on the dwelling/fire ins. policy. Do you think it would be in our best interest to get an umbrella policy for our situation. I think to try and form an LLC just for one property could be very expensive and costly and we are not doing this for a financial gain. What are your thoughts on this?
    Ali Boone
    Replied about 5 years ago
    Hi Mary, I can’t give concrete advice on what you should or shouldn’t do because I’m not a professional any of the fields (entities, tax, etc). But I do agree with you that it could be overkill to form the LLC just for one property. A lot of it would depend on how FL structures their LLCs. If it’s not expensive or intensive, it might be okay. I’ve personally always just used the umbrella policies on mine and it’s worked out fine.
    Mary Vanderford
    Replied about 5 years ago
    Thanks Ali. That was my first thought too getting an umbrella policy, but because the income from the rental property is shown under my social security number it looks like I am the one benefiting from this (tax wise). The housing authority (section eight) would only use one of our social security numbers and since I filled out all the paperwork with them they used mine. I guess I will have to get with a small business attorney to see about setting up an LLC. This is such a pain in the rear!
    Ali Boone
    Replied about 5 years ago
    Oh I know. Welcome to real estate 🙂 As far as the tax thing… if that is the only reason you are thinking you need the LLC, you can actually have the tax side split with everyone. I have an investment partner on some properties and his name is nowhere on them, yet since we both receive 50% of the net, we both file tax returns on it. I couldn’t tell you the exact logistics on how to do that, since my accountant handles it, but I know we do it. So definitely something to consider if that’s the only reason you might need the LLC.
    Tin
    Replied almost 5 years ago
    Hi Ali, great discussion here. Since there are advantages and disadvantages to forming an LLC, what about a sole proprietorship for the rental properties? Yes, no liability protection but would this resolve the coolness factor of owning your own company? Would love to hear some comments on this. Thanks in advance!
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied almost 5 years ago
    Lol Tin. Well I for one do love some coolness factor! I don’t know anything about the details of going the sole proprietor route. Other folks will have to chime in on this one.
    tp
    Replied almost 5 years ago
    Hi, Ali, I’ve just started to dig into this some, but I noticed a big factor for you is the $800+ annual LLC fees in CA, as it is for me. I also noticed you mentioned you use USAA, so perhaps you or a relative served? I’m active duty military with domicile/home base in FL (have driver license, registration, and an address there). However, I was stationed in CA several years back and bought a property that we’ve rented ever since (never bothered to put it under an LLC). Now, I’m incidentally stationed again in CA (we own our personal residence in CA as well). Do you think from your research that we could have our CA rental property under a FL LLC in order to avoid the outrageous CA fees? (FL’s about $150 I think). We do file CA state tax forms each year due to having the rental property, but have never owed taxes as there’s never been any significant profit (after PITI & other expenses). Thanks!
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied almost 5 years ago
    Hey TP! My dad was an AF pilot so that’s where my USAA access comes in. Since you are military as well, I highly recommend them! I wouldn’t use any other company for myself. I use them for evvvverything I can. Absolutely amazing company! Sorry to tell you, you won’t avoid the CA fees if you live in CA. I tried every way possible to argue it, and to have my properties in an LLC from a different state, and the verdict was- nope. CA will still tax you since you live there. If you can find a way around that, definitely let me know! But I wasn’t able to find one when I was looking.
    Thomas Richter from Los Angeles, California
    Replied almost 5 years ago
    TP, it will cost you even more with a Florida LLC owning CA property. You would need to register the Florida LLC as a “foreign entity” in CA and would still be liable for the minimum Franchise Tax of $800. For a single property it’s not worth doing the LLC unless you are a professional landlord. Then you can take tax deductions etc through the LLC. Just increase your liability coverage. There won’t be any asset protection through the LLC as in CA the case law has many instances of a pierced corporate veil in single-member LLCs set up for the sole purpose of asset shielding. best -tr
    Tom Whitt
    Replied almost 5 years ago
    Unfortunately, my father passed away. He left income producing properties to me. To make matters more elaborate, I’m getting married this year. My concerns having an LLC is in regards to estate planning, divorce protection, lawsuit protection and tax advantages. From what I’ve read, & I haven’t spoken to a real estate lawyer about this yet, the structure of an LLC allows transfer of portions of the LLC to anyone of your choosing without expense. It’s a very easy process to do, apparently. This interests me because if I want to leave part of the properties to my daughter and part to my wife I can do this relatively easily. But again, this is my working theory, I must run this by an estate planning attorney first. Can anyone chime in on this angle of LLCs?
    Bradley Clark Professional from Austin, Texas
    Replied almost 5 years ago
    Tom: What state are you living in and what state is the real property in? Do you know if your state is a community property state (like Texas)? Bradley
    Tom Whitt
    Replied almost 5 years ago
    The property and I live In florida and It’s my understanding Florida is not a community property state.
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied almost 5 years ago
    Great question Tom, and one that hasn’t been addressed in here yet. I don’t know the answers but hopefully someone can chime in. And definitely talk to a real estate lawyer for sure. If you find out something, comment back and let us all know!
    Randy E
    Replied over 4 years ago
    Fascinating post, particularly the comments at the end. It sounds like there is no “silver-bullet” answer to solve the asset protection challenge. I own multiple LLCs and deed the properties so their equity is spread out; these LLCs act as a holding company for my properties. I then use a separate LLC as an “operating company” that is used to sign leases and conduct general management business on behalf of my holding companies. I keep separate bookkeeping for each LLC and don’t comingle any funds between them or with my personal funds. Each real estate LLC collects income and pays direct costs for each property respectively. The leases have to show the title owner on the deed as landlord, so they are structured as follows: Holding Company, LLC BY: Operating Company, LLC, its Manager. This seems to add an additional layer of protection. I must stress that (1) this is NOT legal advice, and (2) I am NOT an attorney. I don’t even play one on TV. Asset protection is unique to one’s situation and location, so by all means consult legal and accounting advice that is tailored to your unique situation.
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied over 4 years ago
    Haha Randy… I like that- don’t even play one on TV. Thanks for sharing all of those! Very good to read!
    Christopher Block Involved In Real Estate from Saint Paul, Minnesota
    Replied over 4 years ago
    I have been wondering about this for awhile and have a couple questions I would love if someone could answer to me. If you choose not to purchase these rentals in a LLC how do you get business funding? Dunn & Brad street type stuff, large lines of credit from banks, working with portfolio lenders, etc… For you say that banks won’t lend to LLC’s, but my experience has been the exact opposite. It is challenging for my client’s to get financing because of their DTI situation, and since they are just regularly people the banks don’t see them as a “business” but just a regular ole person. Are there not more creative financing options afforded to business owners than individuals? The flip-to-rental-refinance is very popular and hard money lenders won’t lend to anyone who is not an LLC. Contract for Deed financing is hot and you need an LLC for that pretty much. My point is that I would argue that an LLC actually gives you more flexibility on the financing front than not having one. I would think most real estate investors don’t want to box themselves with only 1 tactic, so having that flexibility is important long-term. It would be nice to hear from rental owners who choose not to use an LLC on how this effects business funding. To me, if you can get access to the same type of business funding regardless of having an LLC or not is a huge question that would sway this argument one way or the other.
    Thomas Richter from Los Angeles, California
    Replied over 4 years ago
    I’ve responded earlier in this post before, but now have some real world facts after refinancing our rental portfolio. This only pertains to us and I’m not implying this is standard. In our situation, the bank required us to start an LLC in order to get a commercial loan and credit line. Nevertheless, they still looked at DTI and private finances in order to approve it. This is a disregarded LLC so ultimately it doesn’t matter much either way. My guess is, things would be different if there were partners. But for our purposes it was simply a requirement by the bank because they do not lend to individuals (they won’t even come to your house for signing, because they are only allowed to go to business locations). It should be noted that this type of commercial loan is not “commercial bank” loan stuff. In my experience there is a $10m segment of bank lenders with little options for in between. That is to say that it is fairly simple to qualify below $2m and above $10m, but much harder in that dead space in between when it comes to commercial loans. Don’t ask me why. Anyway, I’ve said before that for asset protection purposes an LLC is pretty much useless in CA unless you have partners and would like to be protected from their misdeeds; accounting is still done per property with some general cost running under the LLC. You can freely transfer a property between yourself and your LLC if you set it up correctly (and if they’re free and clear or you refinance in the process), so it seems it’s more about meeting requirements of the lender. As to your clients, if they cannot qualify for financing based on their DTI a bank might still give them a commercial loan. My friend just went through that. But they don’t have a business so they simply start one for the purpose of the loan. Long story, short answer: use an LLC if you have to. Do whatever is required to get your financing.
    Craig Pfeffer Rehabber from Louisville, Kentucky
    Replied over 4 years ago
    Having all your properties titled in your personal name sets you up as an easy target for a lawsuit. I recommend an LLC, land trust , or other legal entity to hold your properties in or you’re likely to lose the properties you have before buying any others. You should get every asset you own out of your personal name.
    Chris
    Replied over 4 years ago
    My wife and I had a 6 unit building in our names when we first started shopping for an umbrella policy. I called ALL the big companies and heard the same story over and over: No umbrella if we own more than 4 units in our names. Not at any price! This is a pretty clear signal to me that using an LLC is the right move from a liability perspective. We transferred everything over to an LLC and have been buying units in them since. I have the following liability protections now: 1) 1 million liability policy on each property ($75 / property / year) 2) LLC around each property 3) 1 million umbrella policy on us personally (protecting us from LLC and LLC from us?) If there’s some way to make things better without being much more complex. I don’t know it yet. FWIW: Our PA LLCs have no annual filing fees or upkeep BS. $800 and legal upkeep crap might make me think about this differently.
    Matt McGaffey Real Estate Investor/Broker from Bellevue, Washington
    Replied over 4 years ago
    I have quit-claimed two properties without any recourse from my bank — that said, both of my properties were with the same bank (a big bank), and I filed one at a time to lower the risk that both would fall under the due-on-sale clause. Overall, I think it depends on the bank, but also the real estate and regulatory environment. Currently, we are in a fairly low-risk and still low-regulation environment (according to banks and relative to a few years ago), so when I filed my quit claim deeds, I felt more confident that it wouldn’t trigger that due-on-sale clause. If banks were taking heavy losses, I would feel less comfortable filing.
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    Matt I commented to someone above about my experience with the due on sale clause. My lender does not allow LLCs ever. I called them. My loans (have three with this lender) were sold within days of settlement. The due on sale will be triggered when sued. Your loan is still on public record. I talked to a lawyer from the “other side” . First thing he will do during the discovery phase is notify the lender. Changed my mind. Most comments recommend talking to a real estate attorney and a CPA. Talk to a tenant’s rights attorney and check their track record. If it has merit they win. Even if it’s frivolous your lender will have been put on notice.
    Joel Linburg Real Estate Investor from York, Pennsylvania
    Replied over 4 years ago
    Some of the questions I have had regarding having each property in an individual LLC are related to how to manage them so everything is seen by the courts as separate. Does every property require it’s own bank account? Will the expenses for each property need to be paid from a separate checking account? Does the tenant need to pay rent to that LLC? How and at what time does the income transfer to my personal accounts without being considered commingled? Do all utilities need to be in the LLC? This seems like a tremendous amount to manage if you have a bunch of properties. Should you use your personal address as the address of record for each LLC? Another question relating to this topic: If you have a commercial LOC encompassing all of your properties with a line amount close to the value of the properties does that discourage lawsuits because of the lack of equity? Does it make a difference whether the line is fully utilized or not?
    Thomas Richter from Los Angeles, California
    Replied over 4 years ago
    Does every property require it’s own bank account? —- No. The LLC needs a separate account. If you have one LLC per property then yes. You still have to do accounting per property, though, for tax reasons. Will the expenses for each property need to be paid from a separate checking account? —- Same as above. No if one LLC, yes if one LLC per property. Does the tenant need to pay rent to that LLC? —- Yes. LLC is the landlord. How and at what time does the income transfer to my personal accounts without being considered commingled? —- LLC is a pass-through entity. If it’s single member (SM) then it goes on your personal tax return (no separate LLC return). If it’s multi-member it has its own return and you get a K-1 for your personal return. You can make owner draws at anytime which is an accounting process only. You pay taxes on the full income of your LLC whether you draw from it or not, through your personal tax return (either direct or through K-1). The more you keep it separate and follow bookkeeping rules, the better. It’s all about “see? I’m not commingling!” Do all utilities need to be in the LLC? —- Should be, but if it’s single member it sometimes easier not to. Just account for it in your LLC books. Insurances will often be in your name with LLC as co-insured. Commercial insurance policies are prohibitively expensive for anything below 5 units. Should you use your personal address as the address of record for each LLC? —- Yes, if you want to take home office deduction for LLC. You can still use an agent so if it’s looked up online the agent’s address appears. But for everyday business it sure is easier. Also consider local taxes. If you have a commercial LOC encompassing all of your properties with a line amount close to the value of the properties does that discourage lawsuits because of the lack of equity? Does it make a difference whether the line is fully utilized or not? —- I have heard attorneys state as much. If you don’t own the property outright, they can’t sue for it.
    Gary Li Investor from Rowland Heights, California
    Replied over 4 years ago
    From the first day post this article till today, I believe many readers already have owned many properties, it is time to plan the Estate, does anybody want to share your experience on how to prevent the Probate, how to protect your Real Estate Asset, and how to transfer those Asset to your beneficiaries and how to prevent the Estate Tax etc.? where do you put your Properties now? what structure are you using now? Thanks!
    William Morrison Investor from Silver Spring, Maryland
    Replied over 4 years ago
    ALI, thanks for the thread. I enjoyed reading through it today. Interesting it spans several years. I’m your out of state partner type in a California investment. We chose not to LLC based on costs to return. We went Partnership. One partner is a CA resident. I have Maryland and North Carolina rentals as well. The Doing Business rules apply in both states and many others which limits the Nevada and others advantage. The rental itself has to be registered in the state either foreign or local. Anyway I have both personal ownership and LLC involvement. Found it was hard to move property to an LLC without refinancing and that at commercial rates. The tricks I heard about that would allow me of move property without telling the mortgage company disappear when the suing attorney notifies the mortgage company. And isn’t that the very time you wished you had the veil. I did find having an S-Corp to provide real estate services to include repair review and bill paying had some tax advantage. I still have a property manager do placement and day to day management. Common theme above that seems misguided is the idea that you can do business in another state without registering there. Just look up the states that require a registered agent. Even some of those so called hide and seek states. Great thread.
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied over 4 years ago
    Great info William, thanks for sharing!
    Sean
    Replied about 4 years ago
    This has been a great thread and interesting it has spanned many years. I was thinking of forming a S-Corp for a property we have, but now am not sure? When I married my wife, she had a house of her own and the note is with her mother. We are now renting her house (in FL) and we have moved out-of-state. We put in the lease that the renter should get Renters Insurance, but did not require it. My worry is that my wife gets sued and our personal assets are hit (she is on the deed here in TN, but not the mortgage). Would I be better off with an Umbrella Policy?
    Sean
    Replied about 4 years ago
    This has been a great thread and interesting it has spanned many years. I was thinking of forming a S-Corp for a property we have, but now am not sure? When I married my wife, she had a house of her own and the note is with her mother. We are now renting her house (in FL) and we have moved out-of-state. We put in the lease that the renter should get Renters Insurance, but did not require it. My worry is that my wife gets sued and our personal assets are hit (she is on the deed here in TN, but not the mortgage). Would I be better off with an Umbrella Policy?
    Account Closed from Raleigh, North Carolina
    Replied about 4 years ago
    Great Post! This post hit the nail on the head for my questions.
    Angie Cal
    Replied about 4 years ago
    Have 7 properties in Calif. ALL of these properties need work. Need to move money around for repairs. Don’t want to trigger a due on sale clause, creating an LLC? 1. If I create an LLC, can I sell one property and avoid the capital gain, as the money will need to go into the other properties. 2. What will it cost to create an LLC? 3. Any advise from anyone, moving forward. Respectfully, What to do?
    Thomas
    Replied about 4 years ago
    Due sale clause does not apply cuz you’re not selling into LLC. You would have to look out for transfer tax and that depends on county. Most counties in CA let you move property into and out of an LLC without transfer tax as long as the percentage of ownership does not change. Call your county’s tax assessor. There is a long list of exemptions (37 or so). If you sell one you cannot avoid capital gain. It’s a sale. Unless you 1031 exchange it or it’s in an IRA. Cost depends on bells and whistles – legalzoom or nolo you can do as cheaply as $300. And you will always have $800 minimum tax per year. Through lawyer it can be $1,000, but might be easier since you can include LLC transfer ($250 per property at legalzoom). You can DIY, too, it’s not hard, small filing fee. If LLC is single-member no tax implications, it’s a pass through. If LLC is Multi-Member you have a separate return (~$1,000-1,5000 for CPA). Not sure what you mean by moving money around. You can always write off losses on one towards profits on another anyways.
    Angie Cal
    Replied about 4 years ago
    Thank you for your help. Each property could use $20,000.00 in work? Don’t have the working funds required for these problems? 1031 wont work, as I wanted to use the money from the sale of one of the 7 properties to fix required problems in the other properties. If I put the properties under LLC and sold one property, could I use the money from the sale to fix the other properties. Again, Thank you
    Thomas
    Replied about 4 years ago
    Yes, of course you can use the money for the other properties, it’s your money! Doesn’t matter if they’re under LLC or not. It all gets tallied up on your tax return anyways. LLC does NOT pay its own taxes, it always comes back to you, either directly on tax return or through Schedule K (?). Even in the LLC you have to do accounting for each property separately on tax return. Simplified: Prop A loses 2,000, Prop B gains 4,000. Total taxable profit = 2,000 Prop A loses 20,0000 (repairs), Prop B sold for gain of 100,000 ( profit taxable). Total taxable profit = 80,000 (minus cap gains tax coming out of 100K). Repair cost are part of expenses, just make sure you declare yourself a real estate professional to get 100% deductible expenses. LLC is CA is good for separation of private and business accounts, etc Some commercial lenders require it. Asset protection is minimal, particularly in single member LLCs. Helps against lawsuits from inexperienced people (small claims) but not against real lawyers. To do what you describe there is no need for a LLC.
    Curtis Guilbot from Austin, Texas
    Replied almost 4 years ago
    I agree with commenters Terry P & Tim Norris (and love John T. Reed!): Don’t presume absolute liability protection from either insurance or business entity structure (LLC or otherwise). If someone wants to sue you, they will. And even if you are not liable, that doesn’t stop them from naming you in a suit, and costing you time, money, and aggravation to fight it (been there). To Ali’s original point, weigh the costs vs. benefits. We have 3 doors, will likely add 1 or 2 more; all held personally (no LLC), with umbrella policy.
    Agnes Jacquet Real Estate Investor from Cupertino, California
    Replied almost 4 years ago
    Ali, You wrote “Even if the LLC is a Georgia LLC, for instance, because I live in California there is no way I can avoid it”. Do you mean that you will still need to pay CA LLC fee even is you have an LLC in another state?
    Kai N. from San Jose, California
    Replied almost 4 years ago
    Yes, have to pay unless you want to fight the Franchise Tax Board on their interpretation of the law. Read Jeffrey Hare’s reply from Aug 24, 2013: https://www.biggerpockets.com/renewsblog/2013/08/17/rental-properties-llc/#comment-134229
    Rachel Feser
    Replied almost 4 years ago
    I had a question about an umbrella policy vs. an LLC. If the amount of the umbrella policy (e.g. $1 million) is maxed out, can’t the injured person then go after your personal assets? But in theory, at least, shouldn’t a LLC prevent this from happening? If your property insurance and umbrella policy (if you have one, in addition to a LLC) are maxed out, an injured person can’t sue for more money? Thanks for the informative comments!
    Jeffrey Hare Professional from San Jose, California
    Replied almost 4 years ago
    Take a deep breath, Rachel. Lots of people make lots of money trying to scare good folks like you into trying to protect yourself from doomsday scenarios like this. In reality, such scenarios are extremely rare, and only get that way if they are allowed to get that bad through inadvertence, neglect, or poor decision-making. Even if we assume a seriously injured but still surviving person manages to get a money judgment that exceeds the total value of your assets held in a LLC and the policy limits of your insurance coverage, and manages to “pierce the corporate veil” and go after you personally, and for some reason you are ineligible for bankruptcy protection, at some point the chase has to stop. Principles of equity and the law allow you to live, and you are entitled to make a living. But long before you would find yourself in such a predicament, there would be multiple opportunities to negotiate a reasonable and realistic settlement to prevent that occurrence from happening. And long before that, you would have taken prudent steps to make sure the apartment balcony was safe and the electrical wiring in your rented property was up to code, the tenant had renter’s insurance, and you made certain your property manager was not featured on Megan’s List.
    Rachel Feser
    Replied almost 4 years ago
    Hi Jeffrey, thanks for your message! You’re right, I probably need to calm down a bit! I guess I’m trying to plan for all eventualities, even the very unlikely ones!
    Jon St.
    Replied almost 4 years ago
    not a single story from a landlord that has been sued. All these strategies are heresay. folks we need some people to step up with real info. I own 6 properties in my name. All my leases are done under a PA LLC I have formed. I have a 1M umbrella personally that lists all my properties. I am hoping that if I ever get sued my umbrella lawyers will fight tooth and nail…………….but who knows. I am asking for info from people that have been sued. Thanks. Jon
    Jeffrey Hare Professional from San Jose, California
    Replied almost 4 years ago
    Jon, you bring up a good point. (See my reply to Rachel posted above). However, asking others to share what happened to them as a means to develop a strategy is risky. I would caution people not to base their asset protection strategy on what happened to someone else, but instead to consult with their own legal, tax and estate planning advisors who can tailor the recommendations to your unique and specific set of circumstances. There are just too many variables involved that could make a huge difference in the outcome of your situation.
    Jon St.
    Replied almost 4 years ago
    Fair enough. However I think it would be interesting to hear maybe a slip and fall case where a landlord was sued who had an LLC vs a landlord that deeded everything in his name and had an umbrella for liability. I know I would be interested in this sort of information. Jon
    Randy E.
    Replied almost 4 years ago
    No one can plan for every eventuality relative to REI property, but I still think the following structure is the best way to go relative to LLC’s: I own multiple LLCs and deed the properties so their equity is spread out. These LLCs act as a holding company for my properties. I then use a separate LLC as an “operating company” that is used to sign leases and conduct general management business on behalf of my holding companies. I keep separate bookkeeping for each LLC and don’t comingle any funds between them or with my personal funds. Each real estate LLC collects income and pays direct costs for each property respectively. The leases have to show the title owner on the deed as landlord, so they are structured as follows: Holding Company, LLC BY: Operating Company, LLC, its Manager. This seems to add an additional layer of protection. I also have a million-dollar umbrella policy on each property. None of this is ABSOLUTLEY full proof against litigation, but doing the “right things” w/your tenants along with adequate legal protection sways the odds in your favor.
    gary
    Replied over 3 years ago
    I have been following this for awhile and have not noticed any investor buying for-closer property .I have 1 commercial rental and 3 other residential properties. commercial property is in an LLC but not the residential properties. Commercial as a tipple net and they have there own insurance which the LLC is named in the policy so i don’t need separate insurance on that, but i do have separate policy’s on my residential properties. Depending on the for-closer, some are in very poor condition that need improvements before they can be rented. I live in NY. I can not get regular insurance on these fore-closer while they are under construction ( because they are not inhabitable) or until they are ready to rent., I did find out there is construction insurance which is crazy expensive so i figured that i would have to form another LLC for the residential for-closer .I feel that I’m a little unprotected on the for closer. As in my and i think most umbrellas my 1.5m dollars umbrella policy is secondary to the primary which i need the primary to have at least 300,000 liability on each of my rentals. Other than buying expensive construction insurance has any one been involved in for-closers rehab for rentals and what is there input on protecting your assets
    Lee Hinton from Middleburg, Florida
    Replied over 3 years ago
    Okay, i have a couple of investment rental all in Florida and i would like to place them under my LLC but, i’m not sure how or who do i contact to make this happen. Also, if the umbrella insurance is a better choice, what are some good ones to choose from? Thanks!
    Antonio Hopkins from Warrenville, South Carolina
    Replied over 3 years ago
    am looking at buying an investment property. I have talked to a couple of different lenders, and they quoted me 25% down and a fixed interest rate for 15 years at 3.75%, but here’s the catch, this is only if I put the property under my name. If I don’t and put it into an LLC or S-Corp, I am looking at 25% down and then a variable interest rate starting at 3.75%-7% with a 3-year balloon that is re-assessed and is changed depending on the market. My question is should I put it in an S-Corp or LLC or just put it under my name? I am not worried about the liability implications because I have landlord insurance along with an umbrella policy. My worry is the tax implications. Can someone provide some advice? The reason I ask is because if the interest rate stays at 3.75%, I can make a pretty good return on my investment, but if the interest rate goes up to 7%, there is not much left for profit, especially if the three-year assessment rises more than 7%. The only issue I am wondering about is how much will I be taxed if I left it under my name, rather than an S-Corp/ LLC? I am sure someone has faced a similar dilemma before.
    Anthony Johnson Senior Property Manager & Broker from Dunedin, Florida
    Replied over 3 years ago
    It doesn’t really matter, get the best rate, go for 30 years, and then get a CPL liability policy for everything you own, read my post below, always go for best terms, if you end up doing this you will own some, and your entities will own some, just keep buying!
    Anthony Johnson Senior Property Manager & Broker from Dunedin, Florida
    Replied over 3 years ago
    Ali, I am a Real Estate Broker & Owner, and owner of a RE Holding Company and I invest in Re related partnerships & I am getting into notes. I started my path by paying hourly rates to the big attorneys,even the attorney that my broker used and they owned most of the Keller Williams Florida operations. I now consult with a rock star CPA that is on the board of directors for my SREIA in Tampa Fl and he represents dozens of local, national, and int investors, and he managed many of his own, and has told me many stories of his and his clients lawsuits. So on my journey here is what I find to be the best was to hold rentals long term. I own 17 SFR all pretty houses, some luxury. So first of all, you open a MM LLC, that is your Opco, operating company, property manager, banking, credit lines, mortgages, portfolio loans, you need the llc to get the BLOC and commercial loans. this LLC is your company, it is who your tenant writes the checks to, it is on all of your leases, vendor invoices, it is the only LLC name anyone usually sees. Now you open a SM LLC (holdco) put 5 rentals in it, then open another one put 5 etc, the sm llc is 100% owned by the MM LLC. So this way you only do one tax return a year, for 20 houses that is 4 sm llc’s and the one mm so $750 tax return plus about $1000 to file annual report and meeting, so $1750 a year for 20 houses and 5 LLC’s. Now some houses I own, and the rest are spread out in the sm llc’s. The homes I own all have a 200,000 xpl policy, tied to a 2 million umbrella and 500k auto insurance at Safeco. To get the Umbrella Safeco requires 300k liability, the first 100k is in my DP3 hazard policy, so I buy the extra 200k that is the XPL. The home owned by the several Sm llc’s are all on the same Cl liability 2mil also. The MM owns nothing it is the OpCo. This is teh Opco/Holdco method used by big biz. I used to do land trusts, just make your sm llc the beneficiary, but why? When your insurance agent gets subpoenaed they will find you. My CPA does scream at me to transfer everything into land trusts, I just do not think they are necessary. And in Florida they just passed a new law I am not even sure you can hide anymore with that. If you can buy the house from day 1 in a trust, then go for it. Use the LLC as beneficiary and I am too conservative to do that with a real bank lien, I do know of one due on sale clause and i do not want to be the one person a decade to get one, the risk reward is not worth it, I hope this helped. BTW set up LLC business acct at Wells Fargo, they will give you BLOC bus line of credit for 25% of deposits and cards, work it, and use that cash to fund deals!
    Anthony Johnson Senior Property Manager & Broker from Dunedin, Florida
    Replied over 3 years ago
    Ali, I am a Real Estate Broker & Owner, and owner of a RE Holding Company and I invest in Re related partnerships & I am getting into notes. I started my path by paying hourly rates to the big attorneys,even the attorney that my broker used and they owned most of the Keller Williams Florida operations. I now consult with a rock star CPA that is on the board of directors for my SREIA in Tampa Fl and he represents dozens of local, national, and int investors, and he managed many of his own, and has told me many stories of his and his clients lawsuits. So on my journey here is what I find to be the best was to hold rentals long term. I own 17 SFR all pretty houses, some luxury. So first of all, you open a MM LLC, that is your Opco, operating company, property manager, banking, credit lines, mortgages, portfolio loans, you need the llc to get the BLOC and commercial loans. this LLC is your company, it is who your tenant writes the checks to, it is on all of your leases, vendor invoices, it is the only LLC name anyone usually sees. Now you open a SM LLC (holdco) put 5 rentals in it, then open another one put 5 etc, the sm llc is 100% owned by the MM LLC. So this way you only do one tax return a year, for 20 houses that is 4 sm llc’s and the one mm so $750 tax return plus about $1000 to file annual report and meeting, so $1750 a year for 20 houses and 5 LLC’s. Now some houses I own, and the rest are spread out in the sm llc’s. The homes I own all have a 200,000 xpl policy, tied to a 2 million umbrella and 500k auto insurance at Safeco. To get the Umbrella Safeco requires 300k liability, the first 100k is in my DP3 hazard policy, so I buy the extra 200k that is the XPL. The home owned by the several Sm llc’s are all on the same Cl liability 2mil also. The MM owns nothing it is the OpCo. This is teh Opco/Holdco method used by big biz. I used to do land trusts, just make your sm llc the beneficiary, but why? When your insurance agent gets subpoenaed they will find you. My CPA does scream at me to transfer everything into land trusts, I just do not think they are necessary. And in Florida they just passed a new law I am not even sure you can hide anymore with that. If you can buy the house from day 1 in a trust, then go for it. Use the LLC as beneficiary and I am too conservative to do that with a real bank lien, I do know of one due on sale clause and i do not want to be the one person a decade to get one, the risk reward is not worth it, I hope this helped. BTW set up LLC business acct at Wells Fargo, they will give you BLOC bus line of credit for 25% of deposits and cards, work it, and use that cash to fund deals!
    Jason Bradstreet from Lutz, Florida
    Replied over 2 years ago
    Very good summary.
    Anthony Johnson Senior Property Manager & Broker from Dunedin, Florida
    Replied over 3 years ago
    ps I forgot to mention that I also have a business attorney and he does my annual report and keeps my books in order that is just as important as insurance. I spent $1800 last dec for him to “go thru” my black binders and update the meetings minutes all of it, also never do a deed yourself or use a title co. only use an attorney, and he opens each LLC, does the annual reports, this is a business not a hobby. My cpa used to do the annual reports, but then I leaned about the minutes and the books having to be 100% perfect or you might lose LLC protections if you do get sued. having an attorney keep your books is the difference between being a business person and a landlord. Those binders are the first thing they ask for.
    Ben
    Replied over 3 years ago
    I am new this this area and I am in processing to quit claim my rental properties into to be established LLC. A question I have is that I have 3 properties in Florida, but I am Michigan resident. Can I put Florida properties in my Michigan LLC or I have to set up a LLC in Florida? If I can use my Michigan LLC to own Florida properties, do I have to file Florida annual report? Thanks!
    BEN
    Replied over 3 years ago
    I am working with my attorney on my estate planning. For liability protection purpose, i am also transferring my personal name owned rental properties to LLCs, one LLC per property. To avoid taxes and annual filing fees, such as $800 per year in CA, my attorney suggests that I can just sign my name on the deed for transfer it to established LLC, but I do not need to record the transfer in the County office. To public, it has no change. In future, just in case tenant sued me for whatever reason, then I can show the deed that the property is owned by LLC, not me personally, so I cannot be sued. He also said the transfer date is the date of signed on the deed, not the date of Country recording. So no matter when in the future, a law suite happens to me, I can be protected by this. Does this sound right? Reply Report comment
    BEN
    Replied over 3 years ago
    I am working with my attorney on my estate planning. For liability protection purpose, i am also transferring my personal name owned rental properties to LLCs, one LLC per property. To avoid taxes and annual filing fees, such as $800 per year in CA, my attorney suggests that I can just sign my name on the deed for transfer it to established LLC, but I do not need to record the transfer in the County office. To public, it has no change. In future, just in case tenant sued me for whatever reason, then I can show the deed that the property is owned by LLC, not me personally, so I cannot be sued. He also said the transfer date is the date of signed on the deed, not the date of Country recording. So no matter when in the future, a law suite happens to me, I can be protected by this. Does this sound right?
    Thomas Richter from Los Angeles, California
    Replied over 3 years ago
    Doesn’t make sense. I think you misunderstand a few concepts. LLC does not offer liability protection if you do something wrong. You are liable for whatever you do, as an individual or as a business owner. It might offer a certain amount of asset protection. It offers some liability protection from wrongdoings of other members of your LLC, but I assume your LLC is single member. Next, each LLC is going to cost you, it doesn’t matter what you do with the deed (and the deed filing fee is $23, once). Each LLC is going to cost you $800 minimum tax, agent fees if applicable, business tax if applicable, and you need a separate tax return at ~$500 each (if it goes on your personal return as a non-K-1 passthrough you’re screwed for asset protection). Also, if you ever need to go to court (exempt small claims) you need to hire a lawyer (you cannot represent your LLC) – every eviction doubles in cost. Something to keep in mind. Believe me, an attorney will sue the LLC and you as an individual if you are the only member. I’m not an attorney and this is not legal advise, but rather experience of owning 35+ units in an LLC in CA.
    BEN
    Replied over 3 years ago
    Thank you Thomas for sharing your experience on the cost for each LLC in CA. My main inquiry actually concerns that my attorney told me that I can transfer my wife and I owned properties DEEDS to a LLC (of Michigan) during my estate planning process, but do not record the transfer in the County where the properties are located at. In this way, there is not a fees or cost change from what I have now. And, he also told me that in case a tenant sued me in future, then I can show the DEEDS signed to a LLC so that my wife and I personally get protected since they can only sue the LLC. Does this make sense?
    Thomas Richter from Los Angeles, California
    Replied over 3 years ago
    Yes, you can transfer the deeds into the LLC. Did he tell you, though, that now the LLC has “nexus” in CA? This means that the LLC now has to be registered with the CA sec of State, because it’s doing business in CA. And it is liable for CA state tax as well as Michigan state tax. And, now you have to pay an agent in CA, so that if someone wants to sue you, they can mail the agent. That’s about 150/year. I don’t know whether the deeds have to be recorded or not. If you have a loan on the properties it probably matters. And if you get sued and the recorders office has your personal name on it, a judge would probably hold you responsible, especially if you own the LLC into which you secretly transferred. As to a lawsuit, a savvy attorney would still sue the LLC and the LLCs owner if it is single member (husband and wife counts as single member in many states). The corporate veil might well be lifted as in CA an LLCs sole purpose should not be asset protection. And it sounds like that is why you are doing it. Again, you will certainly be sued and you have liability whether as an individual or as a business owner. You might gain some asset protection from it, but if the judgment is high and your LLC doesn’t have enough any good attorney would come after you personally. The trial would be in CA, so consider that too.
    Jeffrey Hare Professional from San Jose, California
    Replied over 3 years ago
    Thomas addresses several of the issues raised by Ben’s questionable and risky strategy, but allow me to add a couple more. Since you claim the properties are owned by the LLC, but you presumably have not registered the LLC in California, not only would you have to hire an attorney to represent the LLC, but you would have to register the LLC and pay all back taxes and fees before your attorney could even appear on behalf of the LLC. If the LLC is not currently “Active” it may not do business, which includes appear in court to defend itself. The tenant could simply take a default judgment. As for misrepresenting the true nature of the property ownership as a way to avoid liability for your responsibilities as a landlord — what could possibly go wrong with that strategy?
    BEN
    Replied over 3 years ago
    Thank you Jeffery for your comment. I think it would a risky strategy and does not really offer me a peace of mind as it supposes to be. I have another question: does anyone know for a LLC in Michigan owns a Florida rental property. What’s the registration fee, annual report fees, and taxes?
    Karen R. Investor from Westerville, Ohio
    Replied almost 3 years ago
    All of these posts are making my head spin. I live in Ohio. My husband and I own 4 SFH as rentals. We have an umbrella policy that covers the rentals, and our primary residence, and also our auto policies are part of it too. Do any of you live in Ohio and have Ohio rental properties? Did you go ahead with setting up an LLC or not? Just looking for some Ohio-based input. Thank you.
    Freddy Yang Realtor from San Jose, CA
    Replied almost 3 years ago
    Hi Ali, thanks for the article. I wonder what kind of creative financing ways have you used for out of state purchase?
    Helena
    Replied over 2 years ago
    Great article and communication! Thank you all. I have read comment. All different points of view. I live in Illinois. I own one rental in Wisconsin and one in Jamaica. I have had an LLC which did not have the property titles. I am the sole owner in the titles and sole member of the LLC. I have an umbrella policy. I had rental agreements and moneys paid to and from the LLC. So in sense the LLC was the manager. I have had two cases of legal issues with guests. Fraudulent horrid guest renting the Wisconsin property, who obviously planned to sue from the time he booked the place. He made a huge list of complaints. The judge allowed the guest suing me, the LLC, to win some money for his efforts !!! I never had a chance to say a word in my defense, only the lawyer who represented my LLC spoke and the judge said that, how can the lawyer swear that the property was well maintained since he most definately has never been there!! So there was no way to defend myself and the suing guest had the ball! Lucky the judge felt that the guest was being quite unreasonable and ruled to give him just one day\’s of rent, which was $1700. And I had to pay everyone\’s legal fees. So it was a loss in money, but more upsetting was the fact that I was not allowed to show proofs that the guest was lying. The bigger case was a death that occurred, guest\’s own fault. Drunk and crazy. Sued my insurance. Insurance took care of it. So my feeling is that I do not trust any lawyers ever. They say anything to get themselves a dollar. I had one lawyer advice me to put all my assets into land trust quickly following the death of the guest. That was hugely expensive. And did not protect my assets after all. If the guests family had decided to go after me, I now realize this quick land trust job would have looked very bad in the eyes of the law. I was naive and trusted the lawyer during the panic of the situation. This was explained to me by an other lawyer when I sold these properties and paid more money to dissolve the land trusts. The LLC is good for being a tax expense laundry system I guess, for international travel expenses, and other expenses related to the rental business. It does not protect assets from major law suits that is for sure. And indeed, even for small case law suits, you will have to have some annoying lawyer represent you. More money. Best is to have a huge umbrella policy to cover everything. I just dont know how some persons here comment that it is cheap. My umbrella policy is about $1000 a year. I wonder if the cheap ones actually cover anything. Additionally I have landlord\’s home owners policies with maximum coverage. Insurance is the best way !!! The more insurance, the better you can sleep. Just my experience. Helena
    Helena
    Replied over 2 years ago
    Great article and communication! Thank you all. I have read comment. All different points of view. I live in Illinois. I own one rental in Wisconsin and one in Jamaica. I have had an LLC which did not have the property titles. I am the sole owner in the titles and sole member of the LLC. I have an umbrella policy. I had rental agreements and moneys paid to and from the LLC. So in sense the LLC was the manager. I have had two cases of legal issues with guests. Fraudulent horrid guest renting the Wisconsin property, who obviously planned to sue from the time he booked the place. He made a huge list of complaints. The judge allowed the guest suing me, the LLC, to win some money for his efforts !!! I never had a chance to say a word in my defense, only the lawyer who represented my LLC spoke and the judge said that, how can the lawyer swear that the property was well maintained since he most definately has never been there!! So there was no way to defend myself and the suing guest had the ball! Lucky the judge felt that the guest was being quite unreasonable and ruled to give him just one day\’s of rent, which was $1700. And I had to pay everyone\’s legal fees. So it was a loss in money, but more upsetting was the fact that I was not allowed to show proofs that the guest was lying. The bigger case was a death that occurred, guest\’s own fault. Drunk and crazy. Sued my insurance. Insurance took care of it. So my feeling is that I do not trust any lawyers ever. They say anything to get themselves a dollar. I had one lawyer advice me to put all my assets into land trust quickly following the death of the guest. That was hugely expensive. And did not protect my assets after all. If the guests family had decided to go after me, I now realize this quick land trust job would have looked very bad in the eyes of the law. I was naive and trusted the lawyer during the panic of the situation. This was explained to me by an other lawyer when I sold these properties and paid more money to dissolve the land trusts. The LLC is good for being a tax expense laundry system I guess, for international travel expenses, and other expenses related to the rental business. It does not protect assets from major law suits that is for sure. And indeed, even for small case law suits, you will have to have some annoying lawyer represent you. More money. Best is to have a huge umbrella policy to cover everything. I just dont know how some persons here comment that it is cheap. My umbrella policy is about $1000 a year. I wonder if the cheap ones actually cover anything. Additionally I have landlord\’s home owners policies with maximum coverage. Insurance is the best way !!! The more insurance, the better you can sleep. Just my experience. Helena
    Helena
    Replied over 2 years ago
    Great article and communication! Thank you all. I have read comment. All different points of view. I live in Illinois. I own one rental in Wisconsin and one in Jamaica. I have had an LLC which did not have the property titles. I am the sole owner in the titles and sole member of the LLC. I have an umbrella policy. I had rental agreements and moneys paid to and from the LLC. So in sense the LLC was the manager. I have had two cases of legal issues with guests. Fraudulent horrid guest renting the Wisconsin property, who obviously planned to sue from the time he booked the place. He made a huge list of complaints. The judge allowed the guest suing me, the LLC, to win some money for his efforts !!! I never had a chance to say a word in my defense, only the lawyer who represented my LLC spoke and the judge said that, how can the lawyer swear that the property was well maintained since he most definately has never been there!! So there was no way to defend myself and the suing guest had the ball! Lucky the judge felt that the guest was being quite unreasonable and ruled to give him just one day\’s of rent, which was $1700. And I had to pay everyone\’s legal fees. So it was a loss in money, but more upsetting was the fact that I was not allowed to show proofs that the guest was lying. The bigger case was a death that occurred, guest\’s own fault. Drunk and crazy. Sued my insurance. Insurance took care of it. So my feeling is that I do not trust any lawyers ever. They say anything to get themselves a dollar. I had one lawyer advice me to put all my assets into land trust quickly following the death of the guest. That was hugely expensive. And did not protect my assets after all. If the guests family had decided to go after me, I now realize this quick land trust job would have looked very bad in the eyes of the law. I was naive and trusted the lawyer during the panic of the situation. This was explained to me by an other lawyer when I sold these properties and paid more money to dissolve the land trusts. The LLC is good for being a tax expense laundry system I guess, for international travel expenses, and other expenses related to the rental business. It does not protect assets from major law suits that is for sure. And indeed, even for small case law suits, you will have to have some annoying lawyer represent you. More money. Best is to have a huge umbrella policy to cover everything. I just dont know how some persons here comment that it is cheap. My umbrella policy is about $1000 a year. I wonder if the cheap ones actually cover anything. Additionally I have landlord\’s home owners policies with maximum coverage. Insurance is the best way !!! The more insurance, the better you can sleep. Just my experience. Helena
    Eric Hyde Investor from Torrance, California
    Replied over 2 years ago
    Great article Ali! Thank you for that.
    Edison
    Replied over 2 years ago
    Thanks, I was looking for answers after being hit with an annoying passive activity loss limitation. I think that I am going to get out of the rental business for sure now.
    Lindsey Russell Investor from Dubai , UAE
    Replied over 2 years ago
    Hi all, very long informative article! I have a question, banks financing LLCs. How about the property is owned cash by the LLC and one tries to release equity, surely there would be banks interested then? and where do foreign investors stand in getting refinance?
    Nick
    Replied over 2 years ago
    I’m a small time investor in the process of buying a property containing 27 rental unis. I had always thought LLC was the smart choice until I learned that I would need to hire a lawyer to represent me for everything, except small claims. Am I the only one in the world who hates hiring lawyer for trivial thing like eviction? Ali did not mention it in her thought-provoking article. Only one of the commenters even brought that up. I guess everybody loves lawyers, and spending money on them.
    Jeffrey Hare Professional from San Jose, California
    Replied over 2 years ago
    First, as a real estate lawyer, I will tell you you should not hire a lawyer to handle an eviction, but hire an eviction company. Most have a lawyer who handles the court appearances if necessary. Second, evictions are not trivial, and DIY landlords are their own worst enemy. Third, there are several pros and cons to using LLC or Corporate entities to holding investment property, and what works for one may not be a panacea for everyone else. An LLC is as much of an accounting tool as it is an asset protection measure, but if you don’t set them up and maintain them properly, like any other tool, it won’t serve its intended purpose.
    Anthony Robles Real Estate Investor from Port Saint Lucie, FL
    Replied over 2 years ago
    Good stuff Helps me with my choices As a newbie , I think its wiser to invest my capital , and cells in my small brain 😉 into buying right , limiting my risks and putting things in GODS hands. Thank you
    Joel O'Leary
    Replied about 2 years ago
    Ali, I live in CA too… I understand the $800 annual fee for California based LLC’s, but are you saying there’s still ~$800 annual fees for out of state LLC’s? I’m about to set up 3 x Texas LLCs for existing properties. Now I am reconsidering based on the ongoing cost. Thanks! Joel
    Joel O'Leary
    Replied about 2 years ago
    Ali, I live in CA too… I understand the $800 annual fee for California based LLC’s, but are you saying there’s still ~$800 annual fees for out of state LLC’s? I’m about to set up 3 x Texas LLCs for existing properties. Now I am reconsidering based on the ongoing cost. Thanks! Joel Reply Report comment
    Joel O'Leary
    Replied about 2 years ago
    Ali, I live in CA too… I understand the $800 annual fee for California based LLC’s, but are you saying there’s still ~$800 annual fees for out of state LLC’s? I’m about to set up 3 x Texas LLCs for existing properties. Now I am reconsidering based on the ongoing cost. Thanks! Joel
    Thomas Richter from Los Angeles, California
    Replied about 2 years ago
    Entirely depends on where your properties are. If they are in CA, you will have to pay the minimum tax since your company has “nexus” in CA no matter where your LLC is based (You’re doing “business” in CA). You will have to register your LLC with the CA Sec of State as a foreign corporation and get/pay a local agent (so people can sue you in state).
    Joel
    Replied about 2 years ago
    Thanks, Thomas. I should have clarified.. I have 3 x TX properties in which I’m creating 3 x TX LLC’s. So no worrying about CA charges? Thanks, Joel
    Thomas Richter from Los Angeles, California
    Replied about 2 years ago
    I’m neither an attorney nor an accountant, so you should check with one or call the CA equalization board. As far as I’m aware, as long as the LLC doesn’t have nexus in CA no need to register here, hence no need for fees/min. taxes. The income will be passed through to your personal taxes anyway (either through schedule E or through schedule K).
    Jeffrey Hare Professional from San Jose, California
    Replied about 2 years ago
    I’ve posted this before, but this thread has been running for over three YEARS. If you are a California resident and you are managing a LLC registered in any foreign (outside California) jurisdiction, the Franchise Tax Board requires that you file a Form 568 and pay $800.00. In addition, you have to register your LLC, regardless where it is formed, in the State where the property is located, and pay that State’s annual fees. Please get your advice from a qualified tax or legal professional and DON’T try the “try, fail, learn” approach. By the time you have to play catch up with penalties and interest, it could be a very expensive lesson.
    Joel
    Replied about 2 years ago
    Thanks, Jeffrey. Appreciate the advice. I will continue to consult tax and legal professionals. -Joel
    Joel
    Replied about 2 years ago
    Thank, you. Much appreciated. If I get charged extra I’ll come find you… KIDDING! Only reason I’m asking BP advice is because the Lawyers and CPA’s that I speak to all answer with ‘it depends’. I guess it’s one of those things that you have to just try, fail, learn, try again, and get right at some point. Thank you very much for the help.
    Carmon Campbell
    Replied almost 2 years ago
    We have talked about putting our properties in an LLC/Sub S/etc. however in thinking about estate planning and our assets going to our children, doesn’t it make more sense to leave in personal name so the assets transfer at FMV at date of death? All the deferred 1031 gains go away, etc. Wouldn’t there be tax implications in transferring an LLC to my children after I die?
    Subhash Seelam
    Replied over 1 year ago
    Ali, thanks for sharing your thoughts on this topic. I have 2 rental properties and already set up an LLC (not a well thought out decision, just went by Tax consultant advice). Currently I have mortgages on both my properties on my name. Both are in PA, I live in PA. Tax consultant suggested that I transfer deeds to LLC. I have a 2 part question 1. Is such transfer to LLC warranted given the expenses (2% of value in transfer fees plus attorney fees) I will incur. I don’t quite understand the benefits 2. I see umbrella policy as option in this discussion forum. If I choose to go with umbrella policy, can I just close my LLC and save on its annual fees for filing tax returns?
    Mark Collins
    Replied 9 months ago
    I have read through the comments, and I am still really confused. I am looking at an LLC for the following reason. I would like to be able to set up a self directed 401K. Then using the money in the SD 401K make a loan out the the LLC (since it is a different entity from myself). A loan agreement would be executed between the SD 401K and the LLC for repayment of the loan. The loan can be used for purchasing buy and hold property or fix and flip property. If I don’t have an LLC, I can’t use this strategy is my understanding. I want to be able to have the buy and hold cash flow to me, while paying interest into my 401K. Also, it is my understanding that if I purchase a property and then transfer it into a land trust, it won’t trigger the due on sale clause. Then I can transfer it to the LLC to continue to make the payments on the loan. I would have umbrella policies set up for liability coverage as well. I do live in CA so I would need to file in CA, but looking to have the rentals in Ohio, so would need to register there as well. Looking to set up in NV as the holding company and foreign file in each state as needed. Just trying to wrap my head around this and what I need to do. Do I talk with CPAs in each state? Attorneys in each state? Trying to figure out where to start. Any insight would be appreciated.