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Partnership Investing in Joshua Tree, CA
Hello BP,
Myself and two others are investing in a new construction in Joshua Tree, CA that we will be using as a STR. Two of us live in Minnesota and the third partner lives there in California. I have a couple questions in regards to setting up the proper entity as well as taxes.
1. Would it be better to form an LLC or LLP for this type of deal and should it be created in MN or CA? I would greatly appreciate any attorney recommendations who could help identify and form the proper entity for our situation. Also, does anyone know about what this would cost for an attorney to set this up for us?
2. How will taxes work for each of us since we are in different states? Will the two of us in MN get taxed twice on income tax for CA and MN?
I greatly appreciate any and all information and recommendations on this topic.
Thanks!
@John Woodrich can you answer the tax question?
Of course, you should always confirm with your own CPA who is familiar with your situation, but here's a few generalities:
- CA taxes residents on worldwide income, so the CA resident will likely be taxed on the entirety of income that he/she receives on his/her CA resident tax return, including his/her share of rental income
- CA will likely want to collect tax on all income earned in CA due to CA-sitused real property, so any non-residents in CA should likely be prepared to file a non-resident income tax return in CA to report his/her share of income earned from the CA real property
-I'm not familiar with MN rules, but most states generally allow for a credit for taxes paid to another state. You'd have to find a person familiar with MN tax laws to address how the CA-sourced income would be taxed on the MN returns.
As to the LLP/LLC question, LLPs require a general partner, which usually has unlimited liability. Unless someone is willing to take on unlimited liability, or you want to form an LLC or corporation to serve as the general partner, you may want to consider the LLC structure. Multi-member LLCs are taxed like partnerships unless electing otherwise.
If the property is located in CA, chances are likely that the LLC will be treated as "doing business" in CA and be required to register with the CA SOS and file a CA LLC return; this would be true whether the LLC is formed in CA, MN, or any other state. If your LLC is not doing business in MN, then it would seem to make sense to register it in CA to avoid the need to pay registration fees in 2 states, if you can avoid MN filing fees and requirements. Of course, I am not familiar at all with MN laws.
Hope this helps point you in the right direction.
*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 are advised to seek professional advice.
@Katie Balatbat
Thank you for the reply, this all seems to align with the research I've done online so far.
Do you know if an out of state LLC applies for a foreign qualification to do business in CA, do they need to pay the $800 annual fee to CA each year? Or would the LLC only need to pay the MN fees going forward?
Quote from @Nick Knoblach:
@Katie Balatbat
Thank you for the reply, this all seems to align with the research I've done online so far.
Do you know if an out of state LLC applies for a foreign qualification to do business in CA, do they need to pay the $800 annual fee to CA each year? Or would the LLC only need to pay the MN fees going forward?
If an LLC is doing business in CA - whether formed as an in-state CA LLC or formed elsewhere and registered as a foreign LLC in CA - it will need to file documents with the CA Secretary of State, and file the annual LLC tax return to pay the $800 min tax. Any LLC that is "doing business" in CA is supposed to register with Sect of State and pay the $800.
*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 are advised to seek professional advice.
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There shouldn't be double taxation because rental real estate normally operates at a tax loss.
The potential time that there will be a tax consideration is when you sell the property.
However, your resident state(MN) will provide you a credit for taxes you pay to a different state.
This will avoid double state taxation.
In general, California state taxes are higher than Minnesota state taxes, therefore, you will be paying the higher of the two state tax rates, which is California.
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