I currently own two LTRs (one in MS and one in CA), and will hopefully soon own one STR (CA). All of my properties are currently owned directly by me.
I've been advised to hold each property in an LLC, however I've also been advised that insurance on properties held in LLCs is more expensive and harder to get.
I have another friend whose properties are help in a trust. I've also held of holding properties in individual LLCs that are owned by one S corporation, which allows for a 60 / 40 split between ordinary income (regular tax) and dividends (capital gains tax rate).
With the goal of minimizing taxation and liability protection, what would be the recommendation from more experienced people here?
I currently own two LTRs (one in MS and one in CA), and will hopefully soon own one STR (CA). All of my properties are currently owned directly by me.
I've been advised to hold each property in an LLC, however I've also been advised that insurance on properties held in LLCs is more expensive and harder to get.
I have another friend whose properties are help in a trust. I've also held of holding properties in individual LLCs that are owned by one S corporation, which allows for a 60 / 40 split between ordinary income (regular tax) and dividends (capital gains tax rate).
With the goal of minimizing taxation and liability protection, what would be the recommendation from more experienced people here?
I'm also based in California.
S-Corps are generally for active income (think Flip, Real Estate Agrent) and
LLCs are generally for passive income (like rentals/STRs)
The LLC and insurance is what investors are calling "Asset Protection" and it's something you'll want to invest in. Make sure you get the entity structure right or you'll pay more taxes.
. . .
*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice
There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.
California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.
Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted. If you have a loan, you may wish to look into due-on-transfer clauses.
If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.
Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs. You'll also want to coordinate with your estate plan, and consider getting an estate plan if you do not yet have one in place.
As to the trust, that's generally an estate planning tactic rather than asset protection. California's probate rules can be drastic in the event of death that having a proper estate plan in place can help in any number of situations, including if just traveling or incapacitated.
These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.
*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
Anyone have experience on the issue of getting insurance on a property held in an LLC? I did a search on the forums and insurance seems like it could be a major problem.
Anyone have experience on the issue of getting insurance on a property held in an LLC? I did a search on the forums and insurance seems like it could be a major problem.
Hi Marc, My clients sometimes encounter issues obtaining insurance for their properties when they are held in a trust or LLC. Apart from shopping around for a new insurance company that will be easier to work with, you can also add the entity as an "additional insured," leaving yourself as the named insured or vice versa.
Anyone have experience on the issue of getting insurance on a property held in an LLC? I did a search on the forums and insurance seems like it could be a major problem.
I currently own two LTRs (one in MS and one in CA), and will hopefully soon own one STR (CA). All of my properties are currently owned directly by me.
I've been advised to hold each property in an LLC, however I've also been advised that insurance on properties held in LLCs is more expensive and harder to get.
I have another friend whose properties are help in a trust. I've also held of holding properties in individual LLCs that are owned by one S corporation, which allows for a 60 / 40 split between ordinary income (regular tax) and dividends (capital gains tax rate).
With the goal of minimizing taxation and liability protection, what would be the recommendation from more experienced people here?
I'm also based in California.
S-Corps are generally for active income (think Flip, Real Estate Agrent) and
LLCs are generally for passive income (like rentals/STRs)
The LLC and insurance is what investors are calling "Asset Protection" and it's something you'll want to invest in. Make sure you get the entity structure right or you'll pay more taxes.
. . .
*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice
Anyone have experience on the issue of getting insurance on a property held in an LLC? I did a search on the forums and insurance seems like it could be a major problem.
I have houses in two different LLC’s in Texas and insurance is not an issue at all. The name on the insurance policy is just the name of the LLC. It doesn’t cost any different than being under your own personal name.
@Marc Zak Using an LLC for each property provides strong liability protection by isolating risks to individual assets, with income and expenses flowing through to your personal taxes on Schedule E.
However, in California, each LLC incurs an $800 annual franchise tax plus gross receipts fees if revenue exceeds $250,000, and property insurance may cost more. A revocable trust offers excellent estate planning benefits but provides limited liability protection and no tax advantages, while irrevocable trusts provide stronger protection but less flexibility. Consider balancing liability protection with administrative costs, and consult with a CPA to align your structure with your financial and legal goals.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
Royal Oath Insurance Group4.9208 Reviews
INVESTOR FRIENDLY CPA®4.9242 Reviews