Switching from a California-based LLC to a Wyoming-based LLC

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Switching from a California-based LLC to a Wyoming-based LLC

Gulliver R.
Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes

Hi All,

I'm planning on switching from a California-based LLC to a Wyoming-based LLC for my California rental property. Let me explain..

Currently I own a property in California which is owned by a California-based LLC. So my plan is to create a Wyoming-based LLC because there's no state tax there and the fees are lower. Then I want to have that Wyoming LLC be the LLC that holds title to my California property. So my question is: can I do that? And is there anything you think I should know about this before I pull the trigger on it? Thank you in advance for the advice! :)

Best,

Gulliver

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3y

@Gulliver R.

You can do it, but it will not accomplish your goals.

First, your property is in CA. This is CA-source income always subject to CA state taxation, no matter who owns it. I can own a CA property, while living in Texas and not having any LLC - and CA will still tax me on it. There is no way to avoid CA taxation on a CA rental property.

Second, you are residing in CA yourself, based on your profile. Your mistake, if you ask me. :) Because of you being a CA resident, no matter where you create an LLC, Wyoming included, your greedy state will consider your LLC as doing business in CA, and you will owe $800/yr for the, ahem, privilege. You can avoid this by dissolving your LLC altogether and owning your property personally. Before doing this, get legal advice, because your current LLC may be giving you valuable legal protection. Whether or not it does so is a question for a CA attorney.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    3y

    You are not going to avoid CA fees or tax by doing this. This needs to be discussed with the attorney and tax advisor if you have other reasons other than fees/tax saving issues. 

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    3y

    @Gulliver R.

    You can do it, but it will not accomplish your goals.

    First, your property is in CA. This is CA-source income always subject to CA state taxation, no matter who owns it. I can own a CA property, while living in Texas and not having any LLC - and CA will still tax me on it. There is no way to avoid CA taxation on a CA rental property.

    Second, you are residing in CA yourself, based on your profile. Your mistake, if you ask me. :) Because of you being a CA resident, no matter where you create an LLC, Wyoming included, your greedy state will consider your LLC as doing business in CA, and you will owe $800/yr for the, ahem, privilege. You can avoid this by dissolving your LLC altogether and owning your property personally. Before doing this, get legal advice, because your current LLC may be giving you valuable legal protection. Whether or not it does so is a question for a CA attorney.

    2Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    3y
    Quote from @Gulliver R.:

    Hi All,

    I'm planning on switching from a California-based LLC to a Wyoming-based LLC for my California rental property. Let me explain..

    Currently I own a property in California which is owned by a California-based LLC. So my plan is to create a Wyoming-based LLC because there's no state tax there and the fees are lower. Then I want to have that Wyoming LLC be the LLC that holds title to my California property. So my question is: can I do that? And is there anything you think I should know about this before I pull the trigger on it? Thank you in advance for the advice! :)

    Best,

    Gulliver


     I’m not familiar with California law, but most states require that out of state corporate entities register to do business in their state, so it’s not like you can hide your activity. As others have said, states can tax their own land and the revenues derived from that land. You can’t siphon it off somewhere else and avoid the taxes. 

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  • Jason Marino
    Attorney · Member since 2022 · 160 posts · 186 votes
    3y

    What was discussed above is accurate. I have spoken with investors that have tried to avoid the California franchise tax in a similar situation, but there is no legal way to do this if you have an LLC and are a California resident. California is very broad in their application of this tax. Moreover, an LLC normally must be formed in the State that it holds title to real property or needs a foreign registration in the State that it holds title property. Something that you might consider to avoid the California franchise tax legally, instead of an LLC, is the use of a Delaware Statutory Trust. It is a strong and flexible entity that provides many of the same benefits as an LLC.

    2Reply
  • Gulliver R.
    OP
    Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
    3y

    Thanks everyone for all the feedback! That's really good to know.

    @Jason Marino - I'm going to look into that trust. Any resources you recommend I look at? Also, my mailing address is in Seattle. Not sure if that makes a difference. But I have rental properties in other states. 

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  • Gulliver R.
    OP
    Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
    3y

    @Michael Plaks - I reside in Seattle WA and LA both. But my domicile is Seattle, WA. My Seattle address is on all these areas: IRS, work, credit card, bank card, personal mailing, billing address, etc.

    I think I'll take your advice and dissolve the CA based LLC. There is no protection I get from it other than limited liability. I have really good insurance for the CA rental property. I'll consider WY LLC or the Delaware Statutory Trust that @Jason Marino recommended. 

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    3y

    As others have mentioned, you normally pay taxes depending on the state where you have sales, payroll and property.
    You don't have any sales, payroll or property in Wyoming so you are not shifting any income to a state without an income tax.
    As such, the rental will still be taxed by California.

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  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    @Gulliver R.

    Thanks for bringing the topic of LLCs up. I also heard about doing a Wyoming based LLC. None of my investor friends who own 1 to 4 properties in the Bay Area have LLCs, which surprised me. The only person I know with LLCs owns 11 properties in the Midwest. As far as anonymity I looked up one of my friend's properties and it was recorded by the county with his name on it, not the LLC. That doesn't very anonymous to me if his name is linked to the property address. I purchased additional umbrella insurance beyond the rental dwelling insurance. It's fairly inexpensive.

    @Jason Marino I'll also look into the Delaware Statutory Trust and consult and real estate attorney.

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