Alabama Rental Property: Should I start an LLC, Corp or Trust?

8 Replies

Hi! I wanted to get some opinions from fellow real estate investors in Alabama, primarily from those who have or plan to have many rental property holds. Also I’d love to hear some advice from tax professionals or attorneys. Is it better to purchase these Buy and hold rental investments in a trust, LLC, or corporation? Also I heard about a series LLC? Obviously I am worried about the tax implications but most importantly the liability. Researching this online there is so much conflicting info. Thank you in advance!

Have you discussed this with your CPA and attorney?

The answer is: it depends

Difficult to say without getting all the facts so it is important you engage a competent CPA and attorney who can guide you. With that being said, generally, rentals are better owned in an LLC as opposed to a Corporation. In regards to Trusts, that depends on what your goals are.

@Jake Snavely

I personally use trusts for anonymity 

LLCs for liability purposes as well as insurance 

And a corporation to manage the properties.  

@Lance Lvovsky is correct unless you understand what and why you are using different entities it’s hard to say which is best or how many you need and when it is best to establish them 

Use the Bp forum for ideas but Get your attorney and cpa to help you. 

OP needs to be aware of potential CA Form 568 and CA $800 LLC tax exposure on an Alabama LLC if any managing-members are California residents.

Best to talk to your tax CPA/EA and attorney OP.  No entity but strong insurance might be the way to go until you reach critical mass.  Consult a pro.

@Jake Snavely

The question of whether to create an entity is a personal decision, and there's a bunch of posts on BP about it.  If you're buying in another state - you can probably do it either way - if you form in L, you will need to register as a foreign LLC in CA. If you create a CA LLC, you will likely need to register as a foreign LLC in AL. CA takes a broad scope of what constitutes "doing business" in CA so either way you will be subject to the $800 minimum tax in CA. Not sure as to AL laws if they also have an entity level tax or minimum tax. You'll need to look into whether owning property in AL also subjects you to income tax in AL on an individual level - might need to file a AL tax return. Also look into AL's rules for agents of service of process. Having a AL-created LLC might require you to have an in-state agent for service of process, whereas filing as foreign, maybe you don't need an in-state agent.

Also, a point of caution - Bigger Pockets is a great way to get good information but California does not recognize series LLCs.  Each one would subject you to the $800 tax.  So tread with caution with advice from people who do not live in California or are not familiar with CA laws.

Along the same lines, CA generally has more complex laws in their corporations code and more requirements and such that sometimes it can make sense to create a CA-based LLC, despite an increased cost to set it up, especially since you will be subject to taxes anyway.

Also, if you're doing flips, you may want to look into an S-corp as a possible entity structure.

When you say trust, I'm not sure if you're referring to a land trust or a gift trust, or just a family/living trust.  You'll likely want to have an estate plan and family trust in place if you do not already, though it provides you no liability protection.  If you wanted to not create an entity at this point and just get an insurance policy, you would likely hold title in your family trust.

You definitely should be speaking with a CPA and attorney. Let me know if you need referrals in Southern California or San Diego.

*This post does not constitute legal advice and is not to be relied upon. This post does not create an attorney-client or CPA-client relationship. Readers should seek professional advice.

@Jake Snavely , if you want to avoid the $800 California LLC tax plus registering the California LLC in Alabama, use a trust and sufficient insurance. If you want the protection of an LLC (which is diminishing in its protection power), use a California LLC and pay the taxes and fees. Don't use a series LLC while you remain a California resident.

I would talk to your personal accountant more than anyone. He/she will know more of exactly the right answer for you given your personal income and situation, etc. No one on here will know all of that.

I'm also in CA and have invested mostly out-of-state. I decided against the LLC route for the following reasons-

https://www.biggerpockets.com/renewsblog/2013/08/1...

There's tons of additional info in the comments section too.