Dearborn, MI · Member since 2017 · 72 posts · 19 votes
Do you recommend forming and LLC for each property separately? Is it worth the cost? Also, am I correct if an LLC is registered in a state that has no state income tax I won't have to pay income tax on the rental income even if I reside in a state that has state income tax?
I was also read something about it's easier to pass it on to the kids. Haven't researched it in depth yet.
Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
7y
Putting your properties in separate LLCs gives you some insulation from potential legal claims on a given property. For example, if something happens in Property #1 (Owned by LLC #1), they generally can't go against Property #2 (Owned by LLC#2), etc.
Having plenty of insurance is also important.
The main thing is that everything gets done on the up and up and get done properly.
As for state income tax liability, a lot of it depends on how the LLC is set up.
For IRS purposes (and many states) by default, a LLC that's owned by one person (or a husband and wife in a community property state), is usually what they call a Disregarded Entity. This entity does NOT generally file a separate federal return and all of the activity from it gets reported on your personal return and will undoubtedly also be shown on your state income tax return (depending on your state requirements, as some states have no individual tax return requirements).
For IRS purposes (and many states) by default, a LLC that's owned by two or more people (except for husband and wife in a community property state), is usually taxes as a partnership and it has to file a partnership tax return.
A LLC can also elect to be taxed as a corporation and even as an S corporation, but that's too complicated of a topic for this discussion.
Even if you wind up having a Disregarded Entity, many states might have annual filing requirements (such as California, Texas, Nevada and many others). California has a annual minimum tax of $800.
I probably should put together a webinar on this topic if there is enough interest among the BP members.
Phoenix, AZ · Member since 2017 · 93 posts · 105 votes
7y
I've always put my investments in an LLC. Have 3 LLCs and spread them out of the LLC's. Some people think its best to put everyone and a single LLC...but I agree its a lot of work and costs.
Passing on the kids, I've done this by making them members of the LLC. The only problem is that the taxes on the LLC (income) is reported in the K1's for the members, so you kids may get a K1 from the LLC.
Don't think the state where you register the LLC will exempt you from income... If it is income to you (member) then you going to have to pay taxes on it.....
Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
7y
@Cynthia Miller This is a question for one of the legal forums you picked the vacation rental forum.
Call a business attorney and ask questions. You’ll likely find if yhe properties are leveraged its not worth it.
Real Estate Agent · Naperville, IL · Member since 2013 · 402 posts · 177 votes
7y
@Cynthia Miller Look into a series LLC. You can set up a master LLC with each "branch" being its own LLC under that umbrella. More cost effective than setting up individual LLC's for each property. While this can be a good strategy, I don't think you need to even consider an LLC or series LLC until you have multiple (4+ properties). A good umbrella policy should suffice until you start to accumulate more.
Dearborn, MI · Member since 2017 · 72 posts · 19 votes
7y
I want it so that my personal assets are safe from liability..
Josh whats the cost savings for the master LLC with branches? I have read its best to put 1 property in a separate LLC because any other properties in the same LLC are fair game? Any thoughts on this?
Anyone know if the state taxes for rental income are exempt even If I live in a state that has state taxes? I browsed quickly and It seem that the taxes abide by that state that the LLC is registered but not 100% sure.
Real Estate Agent · Naperville, IL · Member since 2013 · 402 posts · 177 votes
7y
@Cynthia Miller in my state it costs $750 to set up series llc then $50 for each additional series. The regular LLC is $500 per LLC. The Series LLC divides the liability into each seperate series so the liability is exclusive to that series or property.
Definitely as question for your attorney and accountant here, but I will take a stab. Firstly, your attorney can advise if you even need an LLC yet. I didn't set one up until I had 8 properties as my attorney recommended around 10 to start considering one though you situation may be different from mine. Costs for LLC's very wildly by state. It's very cheap here in South Carolina ($110 one time fee), but I hear California is quite expensive and includes yearly renewals.
Consult your accountant, but in general, assuming you are setting your LLC up as a pass through/ disregarded entity, you will personally owe state income taxes on the income assuming you and/or your business are in a state with state income tax. You most likely won't get double taxes if you and your rent are in different states both with state income tax though. You will most likely be credited for what you paid in one state on the other state's tax return.
Again consult an attorney and/or accountant for estate planning, but one of the few earthly benefits to dying is passing on property with a step up basis meaning less taxes or even no taxes for the kids to pay out when/ if they sell they the property. Now if you child is grown and is your active business partner, there is probably more benefit to doing an LLC.
Unfortunately, legal entity creation, taxes, and estate planning are so individualized, that it is probably worth the money to sit town with an attorney and accountant to get this write. If you are asking these types of questions, I assume you have something to protect and pass on.
Rental Property Investor · Campbell, CA · Member since 2017 · 419 posts · 499 votes
7y
@Cynthia Miller, if you want it for asset protection an LLC is not the solution. You need the correct insurance and that’s it. If it’s a short term rental use a company called Proper (or similar). If it’s a long term rental you won’t need the commercial policy so you can likely use your current insurance agency to meet your needs.
Each of my properties provides me $2,000,000 in liability damage, plus loss of use Income, and the usual coverage for typical stuff. I also have an additiomal $2,000,000 umbrella policy. What more in terms of asset protection do you need?
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
7y
For passing it onto the kids, my understanding is that it's best to have the properties in a living trust so there is no inheritance logistics, it just becomes theirs. Avoid the taxes and hassle, etc.
Lots of info in the comments too. Personally, I think going the LLC route prior to having the portfolio is jumping the gun, with minimal to no benefit, and makes things (financing) more difficult.
Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
7y
Putting your properties in separate LLCs gives you some insulation from potential legal claims on a given property. For example, if something happens in Property #1 (Owned by LLC #1), they generally can't go against Property #2 (Owned by LLC#2), etc.
Having plenty of insurance is also important.
The main thing is that everything gets done on the up and up and get done properly.
As for state income tax liability, a lot of it depends on how the LLC is set up.
For IRS purposes (and many states) by default, a LLC that's owned by one person (or a husband and wife in a community property state), is usually what they call a Disregarded Entity. This entity does NOT generally file a separate federal return and all of the activity from it gets reported on your personal return and will undoubtedly also be shown on your state income tax return (depending on your state requirements, as some states have no individual tax return requirements).
For IRS purposes (and many states) by default, a LLC that's owned by two or more people (except for husband and wife in a community property state), is usually taxes as a partnership and it has to file a partnership tax return.
A LLC can also elect to be taxed as a corporation and even as an S corporation, but that's too complicated of a topic for this discussion.
Even if you wind up having a Disregarded Entity, many states might have annual filing requirements (such as California, Texas, Nevada and many others). California has a annual minimum tax of $800.
I probably should put together a webinar on this topic if there is enough interest among the BP members.
CPA/Investor · Bronx, NY · Member since 2018 · 236 posts · 45 votes
7y
@Cynthia Miller
Hi Cynthia,
So it appears you have 2 questions here.
First, you don't necessarily need a separate LLC for each property. You may want to look at your equity risk in each property. Maybe if one of your property has a mortgage on it and your equity is maybe 10-20%, maybe it’s not worth an LLC.
You can also hedge risk with good insurance. Because you have to remember it's not just having the LLC. You need to follow all rules so you don't pierce the corporate veil at which point an LLC won’t provide the liability protection you are looking for.
CPA/Investor · Bronx, NY · Member since 2018 · 236 posts · 45 votes
7y
@Ahad Ali + adding on, If your LLC is treated as a pass through entity then basically when the income gets passed to you. You will be taxed in the state you file your personal taxes in even if property is in a different state.
Dearborn, MI · Member since 2017 · 72 posts · 19 votes
7y
Lots of good input from everyone.
Ali ive heard of living trust. Going to check into it. Sounds pretty straight orward.
Stanly good info. I was thinking of seperate LLCs for tue exact reason you stated, to prevemt someone from being able to go after all properties. Also, to protect my peraonal assets if something happened with a rental.
If everything is in my name they could go after it al. If everyting iis in 1 LLC they could go after everything in the LLC. Thatts what ive read so far. Am i correct?
Now im a little confused about state taxes. I read that if your LLC is set up in a state with no state taxes then your would not file state. Now if i live in 1 state that has taxes and the LLC is in a state with no state income tax but the LLC is a disregarded entity how would it work?
Rental Property Investor · Campbell, CA · Member since 2017 · 419 posts · 499 votes
7y
@Cynthia Miller google “piercing the LLC veil” and see how confident you are it will hold up in court. One accounting mistake, one payment going to a personal account accidentally, one use of a personal credit card and poof, you’re personally liable.
Every lawyer that’s commented on other posts with this question have stated LLCs aren’t worth the paper they’re written on when it’s a sole proprietor.
That’s why I recommended the correct insurance in my previous post. It will actually protect you, unlike the LLC.