I'm about to buy an STR (Airbnb) just outside San Diego. I believe it is a good idea to set up an LLC for that property (as there are many people going through, slip&falls may happen more often).
If I plan to close this December, what is good timing to be setting up an LLC?
What is a good way to do it? I assume it should be a California LLC?
The property is probably already held in an LLC. You could purchase the LLC and you would then own anything held in the LLC. Enjoy an $800 annual fee to to state of California. If you are concerned about liability, you should max out liability insurance and get an umbrella policy. This is much more protective than simply holding a property in an LLC.
@Gregg Watkins it looks like I'd have to pay the annual tax AND a liability insurance. Right?
@Dennis Nikolaev the LLC depends on your goals. Are you looking to hold both the deed and the mortgage in the LLC? If so, you should get started on that now. If you just want to transfer the deed to the LLC, you can do that after you close but beware of a "due on sale" clause most lenders have in their contracts (rarely enforced). Transferring the mortgage to an LLC is extremely difficult, so it's best to check out companies like Visio and Conventus that lend to LLCs in the STR space.
Consult an attorney (I'm just a recovering law student), but best way to do it would be to create a California LLC. If you just need barebones, go with Legal Zoom. If you want a little more polish, I'd recommend Schinner & Schain who we used for our Tahoe property. Good luck and DM me for any more questions!
Dennis - An LLC and liability insurance are two different kinds of protection. I would recommend both.
As for the annual tax, yes you need to pay tax every year, but you should be able to bypass the first year now:
"The new rules established by the state’s 2020 Budget Act (AB 85) exempt any LLC that organizes, registers, or files with the California Secretary of State on or after January 1, 2021 and before January 1, 2024, from paying the $800 minimum tax in their first taxable year."
You should have a conversation with an attorney regarding legal/entity structure.
In my opinion, you likely want to have the LLC formed before signing the contract.
Be mindful that some states can take a while to create an LLC after filing out the paper-work.
There are cost savings if you purchase in the name of the LLC instead of your personal name and then transferring it into the LLC.
Be mindful though that it may be more difficult to get financing if you purchase in an LLC.
Best of luck!
Just an old trick from my experience...if you purchase the LLC, you may be able to use the tax basis of the original purchase for your property tax. I've done that in Cali in the past......do some research....
Example - The house was purchased for $200k and put into an LLC. They want $400k for the house. Buy the LLC for $400k and you assume the tax base of $200k for your property tax. At least that's how I did it not too long ago (in 2014)
@Bruce Woodruff WOW. This is the first time I hear about this trick. So the property should be held in LLC already by the seller.
That makes it all worth it. The smaller tax should cover the annual cost of LLC!
Glad to help. Check with your attorney first, but it worked for me. You don't necessarily get smarter as you get older, but you learn more tricks..... :-)
@Basit Siddiqi, @Gregg Watkins, @Jimmy Woodard ,
got it. It is easier to mortgage it in my name and if I feel that the insurance is not converting me enough - I can for LLC later.