Investor · Denver, CO · Member since 2016 · 39 posts · 16 votes
Hello everyone, thanks for reading!
I was doing some digging on this topic but after a while of reviewing conversations that were close to what I was looking for I thought it made sense to post the question.
I am a Canadian living in California and I just purchased my latest investment property in Tennessee which is under construction to be completed late September. Being a Canadian, this is my first US property purchase and I want to make sure I am setting up the asset under the right legal structure so I don't lose my shirt in event something goes wrong.
Questions:
a) I am thinking of setting up an LLC, but not sure of whether I am required to do this in TN (where the asset is) or CA? (where I live)
b) If this is a choice that is available to me, what's the best play here?
c) Come tax time, what will the difference be between me doing my corporate taxes in CA vs TN.
Also, any relevant referrals are appreciated and I apologize in advance if this has been covered somewhere I have not yet seen.
1) If you setup an LLC in TN to hold the property, you are still considered to be "conducting business" in CA because you living in CA and are a member of an out-of-state LLC. CA has very overreaching laws when in comes to out of state businesses. Thus, you would be on the hook for the $800 CA franchise tax fee.
2) The best approach is likely going to be the following: Set up the California LLC and put the property in there. Then file for "foreign business registration" with TN so you are protected in that state.
3) In the scenario above, you are on the hook for both CA and TN LLC franchise taxes and state taxes. An LLC does not pay corporate tax because it is treated as a disregarded entity or partnership for tax purposes so the income flows directly to the members.
Feel free to reach out if you need a more detailed explanation.
Disclaimer: This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.
1) If you setup an LLC in TN to hold the property, you are still considered to be "conducting business" in CA because you living in CA and are a member of an out-of-state LLC. CA has very overreaching laws when in comes to out of state businesses. Thus, you would be on the hook for the $800 CA franchise tax fee.
2) The best approach is likely going to be the following: Set up the California LLC and put the property in there. Then file for "foreign business registration" with TN so you are protected in that state.
3) In the scenario above, you are on the hook for both CA and TN LLC franchise taxes and state taxes. An LLC does not pay corporate tax because it is treated as a disregarded entity or partnership for tax purposes so the income flows directly to the members.
Feel free to reach out if you need a more detailed explanation.
Disclaimer: This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.
Investor · Denver, CO · Member since 2016 · 39 posts · 16 votes
10y
Thanks Naseer!
1) This makes sense.
2) This makes sense.
3) So to be clear, though the property is operating in TN, I am not able to avoid CA state tax through any kind of legal structure.
I guess a follow up question considering you likely have experience structuring legal entities... what would you assume the cost to be for getting it set up (LLC) and to mitigate my exposure would you think I should tie the property to a trust? (TRUST + LLC).
As a resident of California, you will be taxed on income from all sources, whether earned in California or outside. You should be able to receive a tax credit if you paid state income taxes in another state.