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Tax, SDIRAs & Cost Segregation

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Bob Smith
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Is Registering a LLC in the same state as rentals necessary?

Bob Smith
Posted Nov 25 2022, 17:11

This is a tax/legal question

ex. My llc is Wyoming llc. I have properties in MI and AZ. Do I need to register my LLC in MI and AZ for tax purposes?


Context

I have been registering it in the states of the rentals on advice from my accountant, however I had a conversation with an asset protection attorney who mentioned this might not be the case. I havent had a chance to get back in touch with him to verify. The conversation was about land trusts where the LLC is the beneficiary, and in that case I know you dont need to register the llc in the state because the land trust itself is what is doing business in that case.

Any info is appreciated.

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Chris Seveney
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Chris Seveney
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Replied Nov 25 2022, 17:27

@Bob Smith

Yes you should register them as foreign entities in those states. You may also need to pay taxes / do tax returns on those assets in that state as well. Review that with your cpa.

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Basit Siddiqi
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Basit Siddiqi
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Replied Nov 26 2022, 09:49

If the LLC has property in those states or are considered doing business in those states.

The issue with having 'complex' structures is that you may frequently have conflicting information on how to do things.

It may be best to go back to the attorney who helped set up your structure.

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Jason Marino
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Replied Nov 27 2022, 22:24

Hi Bob,

I think that your question was addressed by the post directly above, but I thought that I could provide additional information. You are talking about 2 separate structures in your post. It is useful to speak about each structure in turn.

First, you can have an LLC that owns a property directly. In that case, the LLC is normally considered doing business in the State and requires registeration in that State. If the LLC is not registered in the State and is doing business in the State, there is a risk of fines and, if a lawsuit is initiated against the LLC, the LLC could be disregarded based on the failure to register in the State.

Second, you can have a Land Trust that owns the property directly, and the Beneficiary of that Land Trust can be an LLC. In some cases, owning a beneficial interest in a Land Trust that owns the property is not considered doing business. In that case, you would not need to register the LLC in the State where the property is located. Please note, this is not related to the tax issues that your accountant may be referring to. I am only speaking from a very generalized legal perspective.

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Ahad Ali
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Ahad Ali
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Replied Nov 28 2022, 09:12

Hi Bob,

As others have mentioned, it is best to either form a new LLC in any state you have income generating property in or register an out-of-state LLC as a foreign entity in those states. You would definitely want to consult an attorney or CPA (or both) in the state where the properties are located for a better understanding but from a purely tax perspective, any state that imposes income taxes most likely would require you to report the income from a property in the state they operate in on an accompanying tax return.

Additionally, if and when you decide to sell or exchange any property in a state, most likely there will be closing documents issued by the lender or agents involved in the sale, including a 1099-S which will be reported to the IRS and will likely list the address of the property involved and may trigger a capital gains tax. Many states also require such forms to be submitted to their taxing authorities which would mean the sale would be a matter of tax record and without a corresponding tax return registering the sale, this may result in an inquiry by the agency involved, leading to a lookback into prior year reporting. 

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Bob Smith
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Bob Smith
Replied Nov 28 2022, 14:20

I appreciate all the replies and info! After a few more conversations with the asset attorney and another experienced investor, who uses land trusts, I see that whether or not to register an entity in the state is more about legal implications rather than tax. And having a land trust with the entity as a beneficiary gets around this as the land trusts becomes the entity "doing busines" in the state and not the LLC or whatever.

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Nate Sanow
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Nate Sanow
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Replied Nov 28 2022, 14:39

From a tax or legal perspective I don’t think so / am not 100% sure (not an attorney) but if you need loans, it can be a lender issue for sure.

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Ryan Seib
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Ryan Seib
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Replied Dec 1 2022, 17:47

It depends on the state's "foreign entity" law. Here is the Michigan's:

450.5002 Transacting business; certificate of authority by foreign limited liability company required; application; filing; contents.

Sec. 1002. Before transacting business in this state, a foreign limited liability company shall obtain a certificate of authority from the administrator. To obtain a certificate of authority, a foreign limited liability company shall file with the administrator an application, executed as provided in section 103, setting forth all of the following:

(a) The name of the foreign limited liability company and, if different, the name under which it proposes to transact business in this state.

(b) The jurisdiction and date of its organization.

(c) The address of its registered office in this state and the name of its resident agent at that address in accordance with section 207.

(d) A statement that includes both of the following:

(i) That the department is appointed the agent of the foreign limited liability company for service of process if no agent has been appointed under subdivision (c), or, if appointed, the agent's authority has been revoked, the agent has resigned, or the agent cannot be found or served through the exercise of reasonable diligence.

(ii) The name and address of a member, manager, or other person to whom the administrator is to send copies of any process served on the administrator.

(e) The address of the office required to be maintained in the jurisdiction of its organization by the laws of that state or, if not required to maintain an office by the laws of that state, of the principal office of the foreign limited liability company.

(f) Other additional information as may be necessary or appropriate in order to enable the department to determine whether the limited liability company is entitled to transact business in this state.

The law goes on to say there are a number of penalties for not registering. And, up to a $10,000 fine.

https://casetext.com/statute/m...