How's it going?

Question

My wife and I purchased a primary home about 1.5 hours from Los Angeles, CA and are looking to give short term rentals a try.

What is your experience in transferring the title to an LLC? Or just getting an umbrella policy?

We had this property for 10 months with a FHA loan and it's a pretty quiet mountain town with short term rentals.

Any feedback will be great, thanks!

Moises Salgado · Answer

Thanks for all of the replies! Your response is very helpful, and it will still help me decide which route to go.

Michael Smythe · Answer

Transferring your property with an FHA loan on it will trigger the due on sale clause.

So, you should speak with an experienced real estate attorney.

Of course, many will post here that they've done it and were never caught.

Rick Albert · Answer

A couple of things:

1. Technically (although rare from what I hear), when you transfer your property into an LLC, that is technically a different owner, and the lender may call the loan (meaning you have to pay it back).

2. What mountain town? Look into the STR laws there. My understanding for areas like Big Bear whoever manages the property has to be within a certain distance. There are also permits, etc. to consider.

3. Talk to your insurance broker about an Umbrella policy. I have one and it costs around $500/year. Like most insurance companies, they will avoid paying if possible but if it does apply, then you have the extra liability coverage.

Katie Balatbat · Answer

@Moises Salgado

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 also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

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.