Real Estate Broker · Sacramento, CA · Member since 2019 · 198 posts · 46 votes
Hi there,
New here and to the RE investment world.
My question:
If I buy a property in a different state (say Indiana)/use an Umbrella insurance policy instead of Indiana LLC, and I reside in CA, can I forgo the Foreign LLC cost ($800), or am I still considered doing business in CA?
I would assume not since it's personal, but I just want to make sure.
@Aaron Moayed Hi Aaron, that's a good question. The best way around this problem in our experience is to use a Delaware Statutory Trust (DST) instead. The DST is not obligated to pay the $800 franchise tax mentioned above, and can contain as many assets as you like. The DST is viewed as an estate planning tool, and therefore exempt from the far-reaching corporate tax laws set forth by California's FTB. A properly set-up DST will both protect your assets and bypass the burdensome franchise tax that would be levied against a Series LLC.
Feel free to connect with me if you'd like to know more.
If you are investing in your own name, you will not have an entity with a California nexus.
You could also explore non-corporate entities such as land trusts to create an enhanced liability layer around an out-of-state property but still stay away from any California nexus.
If you don't use an LLC you won't incur the Franchise tax minimum charge of $800, but as a CA resident you will still potentially pay CA income tax on any rental property income with a credit offset for any IN tax paid.
@Aaron Moayed Hi Aaron, that's a good question. The best way around this problem in our experience is to use a Delaware Statutory Trust (DST) instead. The DST is not obligated to pay the $800 franchise tax mentioned above, and can contain as many assets as you like. The DST is viewed as an estate planning tool, and therefore exempt from the far-reaching corporate tax laws set forth by California's FTB. A properly set-up DST will both protect your assets and bypass the burdensome franchise tax that would be levied against a Series LLC.
Feel free to connect with me if you'd like to know more.
Thanks for your reply to my discussion post on CA FTB Nexus Tax.
Do I need to reside in Delaware to take advantage of the trust you mentioned?
I live in California, and I'm wanting to do some small-scale real-estate investing in states like Indiana, Texas, or Utah. I'm thinking that Delaware Trust with an Umbrella Insurance Policy would be the best way to go? This way I can avoid the CA FTB Nexus cost, and I'm still covered on liability.
Let me know your thoughts, and thank you for your expertise.
Does the land trust essentially add a liability layer of anonymity, or is it something else? Is this similar or the same as Weston's suggestion of a Delaware Statutory Trust?
This is an area where a licensed professional will be of more value to you. This is a bit outside my personal expertise, but a concept I am quite familiar with due to the types of entity work we do in our business - thus my ability to chime in if only to point you in the right direction of further inquiry.
There are a variety of trust formats, with specific advantages and disadvantages based on geography and usage. A DST would certainly work, but might be overkill. While less expensive than CA LLC's, DST's are not entirely inexpensive either. How much that cost vs protection is worth to you all depends on scale, of course.
I see. Would you suggest a Real Estate Attorney located in CA or an Accountant? Also contact one in the target state I'm looking to invest in?
Do you recommend getting second opinions on the professional advice I get? I'd prefer to know the information/setup I'm doing upfront is accurate, but not sure if this is overkill.
Either someone who specializes in real estate asset protection nationally or a real estate focused attorney in the state where you are investing will be the best place to start. There is a lot of information on the internet that relies on hype factor, so checking with more than one resource to make sure you are not overbuying based on shiny object syndrome might be a good idea.