LLC First then Purchase? And an LLC for each property?

7 Replies

I’m getting ready to purchase my first investment property, and I plan to purchase more.

I am a realtor and already have an S-Corp set up for my salesperson business commissions.

Should I purchase my first home in my name (then transfer to an entity after the purchase), in my S-Corp or through a new LLC?

If I should purchase it through a LLC, should I have it set up first before purchasing?

And have you received advice to have an LLC for each rental property you own or would 1 suffice for multiple properties?

@Kara Courtney this is an age old debate here on BP. The biggest issue you will face is that you will be financing the property in your personal name most likely, so banks won't let you close in the LLC. This is easier to get around if you are in the commercial space as lenders expect you to have your LLC in that space.

I am not an attorney, but I don't believe the series LLC is recognized in California. You probably will end up with single member LLC's for your properties there. Definitely check with a local attorney though.

@Kara Courtney

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will be deemed to be "doing business" in California and therefore subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property.

Be sure to tell your accountant that you now need to file non-resident income tax returns in each state where you own property as well (though some states have no income tax). Since you are a CA resident, you will pay taxes in CA on ALL your income from all states, and then you will receive an off-setting credit for taxes paid to other states. Therefore, there's really not much of a tax benefit to be decided for which state to form your LLC in, especially if you are a CA resident.

Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

As for the S-corp issue, you will want to look into the tax consequences of holding real estate in an S-corp and upon distribution.

*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.

@Kara Courtney , you may be interested in this article that identifies a strategy that avoids some of the $800 per LLC tax imposed by California. You need a LLC to do the operational portion of your business for liability protection, but you can own each investment in a series trust that can reduce the complexity of owning real estate in separate LLC's.

Originally posted by @Katie Lepore :

@Kara Courtney

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will be deemed to be "doing business" in California and therefore subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property.

Be sure to tell your accountant that you now need to file non-resident income tax returns in each state where you own property as well (though some states have no income tax). Since you are a CA resident, you will pay taxes in CA on ALL your income from all states, and then you will receive an off-setting credit for taxes paid to other states. Therefore, there's really not much of a tax benefit to be decided for which state to form your LLC in, especially if you are a CA resident.

Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

As for the S-corp issue, you will want to look into the tax consequences of holding real estate in an S-corp and upon distribution.

*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.

Also a cali resident buying out-of-state. I'm trying to find other options then a LLC.

I've been reading about Delaware statutory trusts and I'm confused about the cons. Anyone else have more insight? 

Thanks