Help - DST, LLC, or Umbrella Policy

[Ryan Weimer]

I'm a CA resident, my investment partner is a CO resident, and we just bought our first (of hopefully many) rentals in ID and potentially other states.

Given i am a CA resident, it sounds like an LLC isn't practical given the $800/yr franchise tax so a DST or an individual umbrella policy is our best bet. I'm really having trouble finding sufficient detailed information or legal representation that has experience here... Anyone have suggestions?

[Katie L.]

@Ryan Weimer

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.

As you point out, 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. But, for some people, $800 is well worth the cost of having the added protections.

You'll also want to be careful to notice that if you and a partner are going in together to work as a joint venture of some kind without a formal limited liability entity (whether that be LP or LLC), you will likely be treated as a general partnership. General partnerships have unlimited liability. So be sure your umbrella policy covers enough that you are okay to not have an added layer of protection against your personal assets. You will probably also want to have a formal written agreement with your partner covering several situations that could arise such as if one party wants out, one wants to transfer their interest, one wants to encumber the property, one wants to improve the property, etc. In an LLC, you would have an operating agreement that should cover these situations that could arise in the future and lay out rules ahead of time for how to approach them.

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.

These are all things you will want to discuss with your attorney and CPA. 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.