LLC in a different state?

Question

Hi guys, First post here! We are first time investors thinking of doing a BRRRR. We are looking at a house just across the state line (we are in MN, and this house is in WI). We would pay cash for this house. My question is, should I buy this house in an LLC in WI for tax purposes? Not asking about liability... are there any disadvantages?

Meredith Mihm · Answer

It sounds like I should go to a CPA to go over all of the specifics!

John Woodrich · Answer

Having an LLC in WI will not change your taxes.  MN taxes residents on all income, regardless if it is in a different state.  If your rental is taxable, you will have to pay tax in WI, then you will get a credit for taxes paid in WI on your MN return.  So either way you will be paying MN tax rates as long as you are a MN resident.

John Woodrich · Answer

@Mike S. A general answer to most tax or legal issues can be proven wrong with many exceptions, that is why we both agree that people should be consulting a specialist.  We don't know all the information above but you are correct that in most instances you will want to hold a long term rental in an LLC.

Mike S. · Answer

Originally posted by @John Woodrich:

@Mike S. there are a lot of people who come here to get the answer and trust it 100%.  Primary reason I don't answer all the tax questions on here, many people who aren't in the business are giving bad advice that they received from others.  Don't have the time to educate everyone.

One area that your post is not entirely correct is corps getting better tax and fringe benefits and that they usually don't hold real estate assets directly.  It also isn't complete when talking about LLCs because an LLC can be taxed as a disregarded entity, partnership, S-Corp, or a C-Corp.  It can do what it wants.

I believe that it was already mentioned in my initial post as I wrote about LLC being a disregarded entity or partnership in the first part, and an LLC being taxed as an S-Corp or C-corp in the second part. I am still standing by my comments saying that usually you don't hold real estate asset in a C or S corp in the buy and hold situation described by the original poster. There are some exceptions like when you want to sell you homestead to your own a Corp to get the 121 exclusion to transform it as a rental. I did not even mentioned the difference in holding real estate in a Limited Partnership vs LLC entity as it was also out of the scope of the original question.

And there are legal differences between an LLC filing as an S-corp and a simply starting as an  S-corp.

Fair enough, I did not talk about change of taxation, but I don't believe it was in the scope of the original post.

In some states an LLC affords more protection if you have more than 1 member.

This post was not about all the asset protection features of an LLC. I did not write about the charging order protection limitations in some state, neither about the single vs multi member LLC. I am very well aware of those, and you can refer to the many many posts I have written on these subjects. I also wrote a few about the Olmstead vs FTC case that changed some issues for single member LLC in FL were single member LLC lost their charging order protection as sole remedy.

John Woodrich · Answer

@Mike S. there are a lot of people who come here to get the answer and trust it 100%.  Primary reason I don't answer all the tax questions on here, many people who aren't in the business are giving bad advice that they received from others.  Don't have the time to educate everyone.

One area that your post is not entirely correct is corps getting better tax and fringe benefits and that they usually don't hold real estate assets directly.  It also isn't complete when talking about LLCs because an LLC can be taxed as a disregarded entity, partnership, S-Corp, or a C-Corp.  It can do what it wants.  And there are legal differences between an LLC filing as an S-corp and a simply starting as an  S-corp.  In some states an LLC affords more protection if you have more than 1 member.

There is a sample of what you are asking for.  I responded initially to answer the OP's questions.  If you would like to know more you can post a separate thread.

Mike S. · Answer

I hope nobody makes decision based on an internet post, including yours. You always need to consult a specialist in the field before making a decision or do you own due diligence by researching fully the subject.

Being a CPA or a lawyer does not mean that you can't be wrong. However, if you are acting as my CPA or lawyer, and if after having been given all the elements to make a decision, you are making an error, then your liability may be engaged.

On an internet forum, you are not acting as my hired agent and I am not expecting you to. Same thing for my posts in this forum are only my opinion and a not a legal brief nor advice.

But for the sake of the topic, and to educate readers and myself, I'll be interested to get your opinion on where my previous post was erroneous. I was mainly framing my answer to the initial field of real estate and I was also using generalities as there are a few exceptions that I can think of, and probably many more that I even never encountered.

Last, in the field of asset protection and entities, there are different school of thoughts and it always come back at the end to what will fit your own assessment.

John Woodrich · Answer

@Mike S. part of what you say is true but no need to debate.  Only reason I am mentioning this is that I am a CPA and I am hoping nobody takes your advice as gold and makes an entity decision based on it.

Mike S. · Answer

Using LLC (partnership or disregarded entity) is usually tax neutral. in fact they don't pay tax at all, their members do. It also adds some costs (registration, annual report, informational tax return if any, registered agent ...).

They are often used mainly for liability protection.

There are other setups using C and S corp entities (including LLCs taxed as such) that offer tax and fringe benefit, but usually they are not holding real estate asset directly.

Meredith Mihm · Answer

Okay, thanks-- good to know. I heard something in passing on a podcast that made me unsure.

LLC in a different state?

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