best way to structure partnership when in multiple states

[Michael Perreira]

Hello, I currently own 6 SFR properties in Bakersfield CA and 3 SFR properties in South Carolina and am looking for the best advice on how to structure a partnership. I own 3 in Bakersfield on my own, and the remaining 6 with a partner. We are buy and hold investor's looking to build cash flow and, eventually, start buying houses and acquire funding from a tax id of some sort. Looking for guidance and recommendations. Thank for all you do!

[Katie L.]

@Michael Perreira You will likely need two entities not because the properties are in different states but because your ownership structure is different. If you created a partnership or LLC for the properties that you own with a partner and put 50/50 ownership, and then you contributed the assets that you own solely in your name, you would effectively be giving your buddy a piece of the pie. Unless you wanted to do a VERY custom operating agreement.

Do you have an estate plan in place? Perhaps you can hold the residences you own just in your family trust and have a large umbrella policy? Depends on the type of property, what other assets you may have, your risk tolerance, the type of tenants, how well the property is maintained and managed, etc. whether you need/want an entity. You could also create just a single member LLC and hold your share of the properties in the LLC so that you could combine both your 50% share of the jointly owned ones plus your solo-owned properties, and then you would need to change title to the jointly-owned ones to be owned 50% by your LLC and 50% by your partner however he decides to hold it.

You probably should have already been filing taxes in South Carolina if you haven't been already as a nonresident on the income earned from your South Carolina based real property (individual income taxes).  If you're a CA resident, CA taxes you on ALL income earned from wherever sourced.  But, then CA will give you a credit for taxes paid to other states.  So if you filed in SC and owed taxes to SC, you would also be taxed on that income in CA but then they will give you a credit for whatever taxes you paid to SC.  Doesn't quite work out to be a wash because CA usually has higher tax rates so if you earned $2,000 in SC you probably paid a much lower rate... say $50 in taxes but in CA the tax on $2,000 is probably more like $180, but you would only get a credit for $50 so CA still essentially taxes that $2,000 in some fashion.  That's the price we pay for living in CA.

If you create an entity in California, you will be subject to an $800 minimum tax (unless you form a general partnership... but you have unlimited liability with GP), and you would need to register the entity as a foreign entity doing business in South Carolina.  If you wanted to form a South Carolina entity (or any other state for that matter), you still would need to register it as a foreign entity in California "doing business" in CA if you are a resident and are managing from CA.  Which means you will still be subject to the $800 minimum tax even if your property and entity are based out of state.  I am not familiar with SC laws to know if they also have an entity level tax or whether their partnerships and LLCs are purely pass-through.  The Franchise Tax Board takes a broad opinion of what constitutes "doing business" in the state of California so unless your entity was out of state, your properties were out of state, and you had a completely passive non-managerial role, you're likely going to be stuck with paying CA.

I agree that you should likely seek out an attorney to draft a document and discuss your options.  You also will likely want a CPA who knows what he/she is doing as well if you don't have one already.  Let me know if you need referrals for southern California or San Diego.

*This post does not constitute legal advice and is not to be relied upon.  Readers should seek professional advice regarding their situation from a competent professional who knows all the facts of their situation.  This post does not create an attorney-client nor a CPA-client relationship.