Do I need an LLC to get all the tax benefits?

Question

Michael Plaks · Answer

@Jared MontBlanc

You're mixing two independent things together: taxes and legal protection.

An LLC will not create any tax benefits, that part is true.

An LLC might, however, create important legal protection benefits. That is a question for an attorney, and I'm not one.

Then you have to decide whether the legal protection benefit is worth the high cost of a CA LLC.

Ashish Acharya · Answer

@Jared MontBlanc ,

That is true, LLC very rarely will have a tax benefit for a rental activity.

Jared MontBlanc · Answer

Thank you all for your replies, they are most appreciated.  Love the BP community! :)

Ali Boone · Answer

I'd throttle up the umbrella. From what I can tell, I haven't found any greater protection from liability offered by LLCs than what umbrellas cover, and umbrellas are way cheaper.

Katie L. · Answer

@Jared MontBlanc

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. If you create an LLC, you will need a business account.  An LLC does not pay tax per se since it is a pass through entity, so all items of income and expense would be picked up on your 1040 (assuming it's a single member LLC or it's you and your wife as members since California is a community property state).  Therefore I agree the LLC does not provide you tax benefits, and in fact, costs you at least $800 per year in additional taxes, plus the costs of running an LLC and having an attorney form it for you, which is a one-time set-up cost.  You also pay $70 for formation to the state and $20 every other year for a statement of information.  But you need to weight that against liability protection and what insurance can provide for you.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify. This is something you will want to talk with your CPA about.

Additionally, if you don't have an estate plan in place, that's something you'll want to look into as well.  Very important in California to avoid probate which is so incredibly expensive and such a hassle.

These are all things you will want to discuss with your attorney and CPA.  It's important to speak with someone who is familiar with your own situation and can give you personalized advice.  If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Richard Sherman · Answer

@Jared MontBlanc As usual, I agree with @Ashish Acharya .   When your equity is above mayb a million it is probably time to look at a LLC (might be 500k, might be 1.5 depends on the risk tolerance and structure.

I WOULD shop that umbrella policy if 1k is a real number...you should be paying about $400-600 fo 3 million in liability.

Do I need an LLC to get all the tax benefits?

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