Delaware LLC for long term rentals

15 Replies

I am going to create an entity and my 3 priorities are...

1. Asset Protection

2. Anonymity

3. Tax advantageous (would be a plus)

I live in CA, and invest in 6 regions outside of CA. I am no longer comfortable with my umbrella policy and would like to increase my protection from liabilities.

Has anyone in CA, created a Delaware (or any outside state) entity to pursue similar agendas as myself? 

The more research I do, the more complex it seems. I have talked with my CPA, and a few attorneys whom all gave very different advice. 

Thanks for your input!

Cheers!!

Check with your legal and tax counsels and I am not familiar with CA laws but so have a few DE and other LLCs, so here is my take:

1. Asset Protection - Depends on the states you own the property. Not sure there is much more protection it would offer. 

2. Anonymity - Possibility. You can achieve the same and perhaps more by placing the properties in a Trust.

3. Tax advantages - For single member LLC, there should not be much if any difference as they will be treated as a pass through entity.

There will be a more paperwork to file and more fees (annual "shareholder tax", registered agent fee, etc)

If it is a multi-member LLC, then you will also need to create K1s.

Also keep in mind that most banks that issue Fannie/Freddie backed loans will not lend to LLCs (expect for delayed financing)

One area I do find some value in my LLCs is to give a more professional "business appearance" (for listings, collecting rent, etc) but I suppose you can also achieve that via a d/b/a a.k.a "fictitious" business name filing

I have checked with my team, but get contrasting answers on the best solution.

Are you saying that if I create a legitimate LLC, run it appropriately, and got sued, it would offer zero asset protection?

I know the IRS treats sole proprietorship LLC no different than an individual, but states tax them differently. For example, CA likes to take on their minimum tax 800 fee to local and foreign entities, and tax the difference between the subject tax state rate and it's own.

I'm pretty confident I'm going to create an LLC or C Corp, just trying to figure out my structure, and location of the entity.

Plus, I agree with you immensely about the professionalism of having a structured entity.

@Justin R.

It is normally advised that you create the LLC in the state that you plan to invest in. Be aware that CA may require you to file a form 568 and pay a minimum tax of $800.

LLC's should offer asset protection if it is treated like a business and you keep personal and business separate.
You should consult with an attorney to confirm

Talk to the attorney Scott Royal Smith based in Austin TX, he’s on BP

@Basit Siddiqi What would be the advantage/disadvantage of creating the LLC in the state of business vs Delaware?

I was under the impression the location of the LLC doesn't really matter, therefor one should choose a state that has anonymity, landlord friendly, and low filing/tax fees.

@Rachel Bier Thanks for the referral to @Scott Smith. I read a previous forum which someone had some good things to say about him as well.

@Justin R. if after discussions with your attorney you are still under the impression that the location of the LLC doesn't really matter, then you may need a new attorney. @Katie Lepore has provided excellent information across the boards on this subject.

just a quick comment and I see this all the time.....LLC designation is not recognized by the IRS. LLC's are a state designation.

When you have a LLC you elect how you will be taxed (single member file on your personal return - required, multi-member taxed as partnership (1065) or Corporation (S or C 1120S or 1120).

Therefore, the LLC per se does not offer you the tax benefits but the entity selection determines what portion of the tax code should be used.

@Logan Allec perhaps I worded it in a strange way. What i meant is..... If I am able to start an entity in any state, whether I do business there or not, why would I not choose a state that is Landlord friendly, tax friendly, and offers anonymity?

I understand an LLC itself doesn't offer tax benefits, and is seen by the Fed's as nothing more than an individual. The difference is each state has different taxes and fees.

Setting up a series LLC or numerous LLCs in a high fee state such as CA VS a business friendly state could save some money, correct?

@Justin R.

You mentioned possibly creating a c-corp. I'm helping a few people with their analysis right now of C-corp versus LLC here in San Diego. With the newest tax laws, C-corps are at a 21% rate permanently, which may now be lower than your personal tax rate at which LLC income will be taxed (can be as high as 37%). C-corps have downsides of course, but if tax savings is one of your goals, it may be analysis you want to work through. The newest December tax laws also created a deduction for pass-through income that you MAY qualify for, but the rules as to what types of income qualifies and who is able to benefit from it are rather complex. I'm looking at this for a lot of my clients right now. The analysis will depend on many different factors. Then, there's the added wrinkle of brand new partnership audit rules effective just this year that you will want to be sure you talk to an attorney who keeps up on the rules to make sure your agreement is drafted in accordance with these new laws. The beginning of 2018 brought a flurry of new things to consider! Good luck!

*None of this post is intended to be taken as legal or professional advice or relied upon.  It does not create an attorney-client or CPA-client relationship and any reader is advised to seek professional advice.

@Logan Allec thanks for the mention and compliment.  Tough to keep up on all these strings with excellent questions and advice from all over!

@Justin R. I am in a similar situation and found this thread. I am in the process of acquiring a piece of land in North Carolina that has a warehouse and provides monthly income. It will be a Partnership LLC so i understand from a Federal tax perspective(IRS) i just need to file a Informational 1065 but eventually create K-1's and distribute it to partners to show on their taxes. But from a state perspective does Delaware offer any tax benefits vs North Carolina.

Curious which state did you eventually register the LLC and why? Any thoughts are appreciated. Thank you!

@Venu Vedre I ended up going with a Delaware series trust. This offers me asset protection similar to an LLC, anonymity because I'm not the trustee (on record), and my taxes aren't affected as I'm still seen as an individual owner per the IRS. That's important in CA, because if I was doing numerous LLCs the 800 dollar annual filing fee would add up.
Originally posted by @Justin R. :
@Venu Vedre

I ended up going with a Delaware series trust. This offers me asset protection similar to an LLC, anonymity because I'm not the trustee (on record), and my taxes aren't affected as I'm still seen as an individual owner per the IRS. That's important in CA, because if I was doing numerous LLCs the 800 dollar annual filing fee would add up.

 Thanks Justin, just to confirm in your case(Delaware Series Trust) you would still need to register as a Foreign Entity in CA and pay the 800 annual fee. ? 

Hey @Venu Vedre sorry I wasn't very clear. The benefit of the DST (Delaware Series Trust) is that you do NOT have to pay the annual filing fee. Essentially I have all the benefits of an LLC, just no filing fee.

The combination between being in CA (filing fee) and my own partner being my wife, makes the DST the best bet. I utilized Attorney @Scott Smith to prepare my trust. They have been great, and work with people outside of Texas regularly.

@Venu Vedre Hey there! Just confirming that Justin R.'s info is correct. Thanks to @Rachel Bier also for the shout-out. 

Basically, the DST is the option that avoids franchise tax and gives the protections of a Series LLC structure, particularly when used in conjunction with trusts. From this lawyer's perspective, the DST is a no-brainer for Cali investors. The only reason more aren't using it, I speculate, is because it's not nearly as well known as Traditional LLCs--which come with plenty of red tape for Cali or those doing business there. California has far-reaching laws at the state level that make LLCs less advantageous for Golden State investors. The DST is your best alternative, and I'm happy to answer any questions you may have about this structure. Finally--MANY investors have successfully used DSTs as asset protection tools, and they have some handy tax and estate planning perks as well. Good luck and I hope some of that is helpful!

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