Should I put 8 unit rental in LLC?

Question

Hello,

5 years experience with single families and a duplex BRRR strategy but never used a LLC. Looking at buying a 8 unit. Live in CA but have rentals in TN.

Here are my questions:

1. Should I put the 8 unit in a LLC? Are there any drawbacks? For this particular property, it seems like I should due to the size. Do I need a lawyer for this or can I do online?

2. I have a duplex I am BRRRRing. It is in cash in my name. Should I put it into a the same LLC as the 8 unit and then can I do a cash out refi by personally guaranteeing the loan even if it is in the LLC?

My spouse and partner in many of the properties is concerned that the cash out refi could be a taxable distribution from the LLC?  Is that possible if anyone knows about tax.

Thanks,

Danielle

Michael Smythe · Answer

One benefit of LLCs that is often overlooked is that they make it difficult for owners to be identified by the general public, but only if you hire a registered agent.

Yes, the owner can still be found. It just makes it harder for tenants and others to do without a fair amount of effort.

Katie Balatbat · Answer

@Danielle M.

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.  Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states 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 likely be deemed to be "doing business" in California and therefore likely 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 likely 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 may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don’t buy CA property as a CA resident.

Any lawsuits should 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, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC.   Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if 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.

Creating an LLC in California could 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.  California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly 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.

Chris Seveney · Answer

1. Yes this asset should go into a LLC as if you ever want to get financing, it is a commercial property and only lend to a LLC.

2. The duplex is up to you. Others may agree with me but having multiple assets in a LLC is not a bad thing. I worked for a family office that had 1200 units from 6 buildings in one LLC. This is mor a question for you and your CPA and attorney.

Speak to your CPA about taxable distributions - if you take money out of the LLC into you personally if its not a loan - you may be creating a taxable event.

Danielle M. · Answer

Yes, but I am also In CA. With a 800 dollar yearly filing fee for llcs. so putting my single familes or low cash flowing duplex in their own llcs does not make sense. I believe even if I do my llc out of state, Ca requires the $800 fee.

I do understand all properties in 1 llc are exposed to the others.

Amir Khan · Answer

Hi Danielle, the main reason to place a property under a LLC is for liability limitation/protection of assets. **This is not a legal advise/nor am I a attorney** In my opinion, you should definitely place the 8-unit into a LLC. However, I would NOT place any additional properties within 8-unit LLC. The reason is if you place the duplex in the 8-unit LLC, and a tenant from your duplex sues you/your LLC, it will affect your 8-unit property/asset as well. That is why you want to "limit" your exposure by placing them into separate legal entities/compartments. It is pretty simple to do, simply create your LLC and instruct the closing agent/title company/lender that you will be holding the title in this LLC.Regarding the tax consequences, my LLCs are set up as pass through income. For that I would recommend consult with your CPA.