Do you hold your properties in an LLC and if so, where and why?

Question

Anyone have any opinions about what state to create an LLC in to hold investment properties? I have multiple properties in different states but I hear different opinions on where to open the LLC. I'm in CA so I'm considering NV due to it's proximity and laws but I also hear WY, MT, AZ, TN ect. I hear about charging order protection and I'm not sure which states have the best protection in that sense... Do you hold your properties in an LLC? If so, what state do you recommend and why?

Richard Bechtol · Answer

Hi Marissa,

There are very good structures for California investors that have properties inside or outside of the State. These structures provide asset protection while being able to largely avoid the California franchise tax legally. A way that this can be done is using a vehicle called a Delaware Statutory Trust. This entity avoids the California franchise tax, is able to replicate itself like a Series LLC in order to hold numerous assets, and has limited liability protection. This allows for the scalability that would help you since you own multiple properties now without being stuck paying the tax on every single entity.

John Bartlett · Answer

@Marissa Contreras

First let me put this out they for everyone to see. The entity (LLC/corporation) is not a tax structure, and the tax structure (disregard entity, s-corp, c-corp) is not the entry. So many do not understand this.

Next, the LLC typically has to be formed in the state the property is in. The owner of that LLC can be in another state (and should be for protection). NV is the best state to have the holding company in. It has the best laws and best case law to protect you and the assets.

In order to get the protection, a lawyer that specializes in asset protection needs to setup everything, including CORRECTLY worded operation agreements. This operating agent needs to make sure, even if there is a judgement, the Holding LLC isn't required to pay out. Very important step. The IRS actually helped out in case law with this, in the event of a judgement, the IRS gets to collect, even, when the plaintiff can't collect. So they pay taxes on money they can't reach, that includes the lawyer on the other side has to pay taxes on money he can't collect either. This fortress makes lawyers resistant to take on the case to sue you.

The other side of the coin. Let's say it's not one of your business that gets sued, it's you. Maybe you ran a red light and caused an accident, or blew a tire and resulted in an accident. You want to protect your assets from you. Say uou have 5 properties valued at 200k, that's a million in assets someone could sue you for because you own them.

Larry Oxenham at American society for asset protection gave a really great training on this whole topic.

Marissa Contreras · Answer

Thank you for all your input! When I ask my CPA, they tell me to ask my lawyer, and when I ask my lawyer, they tell me to ask my CPA! It's a never ending cycle. I realize my CPA is concerned with paying less in taxes and my lawyer is more concerned with protection but I just feel like they pass the buck every time. I appreciate all the view points and will continue doing my research. Everyone's situation is different but I keep feeling like I'm wasting money doing things the wrong way (opening LLCs in CA and holding properties from out of state registering as a foreign entity) so I really want to get it right this time.

Frank Greg · Answer

Not sure if I read your post incorrectly as to whether or not entity form had anything to do with taxes. For some, incorporation is not just about limiting liabilities but also about determining how you prefer to be taxed and if possible, limiting your tax liability (not to be confused with tax evasion).

If the entity form is a corporation, then you obviously would have to be aware of the double taxation consequence. LLCs, Trust etc. are all pass through entities with the owners being taxed at whatever their personal income tax bracket is. Unless of course the LLC for instance notifies the IRS that it wants to be taxed as a corporation which is a different can of worms. So the entity form can have a tax implication.

In addition to that, some 45 states have varying state corporate income tax rates that can range anywhere from 2.5 to 11.5% and some 5 or 6 of the states with zero state corporate income tax. Some states levy a tax on your gross income not net income. So where exactly you are located and/or do business in, can also have serious tax effects especially if you have significant revenues.

Which state has the best asset protection laws is always a never ending argument but in terms of a duty to incorporate where the property is located, if the primary features they seek are provided by the laws of a different state, they’ll likely initially incorporate out of state and then as a foreign entity where property is located.

Note: you are not always limited to structures such as an LLC or corporation, with a land trust (depending on the state law applies to the trust) it can actually be a superior route to the other entity forms as the owner/beneficiary can be totally 'off grid' in terms of almost complete anonymity with  zero state entity incorporation and maintenance cost.

If you don’t have the personnel internally, who is utilized obviously needs to know what they are doing.

John Bartlett · Answer

@Marissa Contreras oh and your best states for holding companies are NV, WY and AK. Delaware if it's billions of dollars of assets.

Frank Greg · Answer

May be frustrating but some accounting and tax questions can also be or raise a legal issue and not every accountant necessarily specializes in tax for that matter.

Attorneys also can have a very narrow niche in terms of practice area unless of course they have a background or focus in tax, corporate and transactional law generally.

The entity form/structure and location can and does have very real and often significant implications on many levels.

Bruce Woodruff · Answer

Lawyers are ONLY concerned with your liability - as they should be - but just be aware that their brains are trained that way and that they can miss a lot. Now if your attorney were also a big-time RE investor, then I might put more credence in their recommendations.....

I have had LLCs and Corps in Cali for liability purposes, but I generally found them unnecessary and got real tired with paying $800 a year each....

Do a lot of research and make your own call...

Eliott Elias · Answer

I hold them in the state I invest, would get with your CPA on this.

Frank Greg · Answer

Beastly? That's a strong word. Any particular reason for this?

California does seem to generally have a reputation of overregulating or enacting policies that tend to increase significantly the cost of doing business in the state. Factor in the affordable housing issue experienced in most of the population centers and that can make matters worse quick.  Not sure if it played any part in Elon Musk leaving the state and relocating Tesla.

It's not terribly complicated what businesses generally want and I cannot particularly comprehend why or say that CA policy makers are just somehow unaware of this.

I see just about everyone moving out of places like CA and NY but we could be moving a few projects/operation in -- for the right price of course!

Katie Balatbat · Answer

@Marissa Contreras

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 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.

Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. 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.  Of course, with all things, the answers to all these matters will depend on the circumstances.

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.  Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner and/or spouse live in CA, you probably want to arbitrate in CA if the two of you had a disagreement.  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.

*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.

Do you hold your properties in an LLC and if so, where and why?

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