Buying CA property using Wyoming LLC that owns CA LLC, good idea?

Question

Hello BP community,

Thanks in advance for your help! Hypothetical scenario; I live in California, I am buying a property with a few of my friends/partners who also live in California. The property we are buying is located in California as well. One of my friends/partners is adamant that we should open a Wyoming LLC and a California LLC. The Wyoming LLC will own the California LLC, and the California LLC will own the property. We are closing escrow on it in our personal names and then transferring to an LLC shortly after. We are not doing this to avoid taxes, we intend to pay all California taxes since this this particular investment property is solely being operated in that state. Our goal here is for asset protection against frivolous lawsuits. Does anyone have any experience with this is? Is this a good idea or a waste of a time?

Thanks again,

Joe

Jason M McNamara · Answer

@Joe Polyak San Diego here! We have a WY Corp and any out of state filings still have to pay the FTB in Cali.  You’ll need to consult with your legal team on best ways to have your REI portfolio setup.  We run a Corp in WY and every property has a tax deferred LLC to protect from tenants. The Corp sucks the revenue from each property. Certain situations we roll out a trust and roll the property into a trust to protect the transactions.  Good luck!

Jerry W. · Answer

@Joe Polyak, I know very little about CA law.  There is an $800 or $900 CA tax on each legal entity owned that you need to run by your tax accountant.  They should bless this deal from a tax perspective in addition to the legal perspective.  Deciding the tax status is a very big thing too.  This is an area that @Scott Smith works in and he may be able to provide some advice.  I disagree a lot with his anonymity part of his perspectives, but I think may be licensed in CA, and works a lot with liability avoidance.

Scott Smith · Answer

@Joe Polyak Hi Joe. There are of course many factors to consider, but in general if you are looking for a way to protect your assets while not encountering the burden of the $800 fee that CA imposes there are other options such as the Delaware Statutory Trust.

The DST is not obligated to pay the $800 franchise tax mentioned above, and can contain as many assets as you like. The DST is viewed as an estate planning tool, and therefore exempt from the far-reaching corporate tax laws set forth by California’s FTB. A properly set-up DST will both protect your assets and bypass the burdensome franchise tax that would be levied against a Series LLC.

There are some requirements that go along with the formation of the DST, but if you are planning on doing more investments into the future than the DST is a solid investment.

This isn't legal advice, just my opinion as a real estate investor.  If you have any specific questions feel free to leave a reply or send a DM.

There is also an article that I published recently that may give some additional insight when choosing which direction you want to go: https://www.biggerpockets.com/blog/california-real-estate-investors-delaware-statutory-trust/

Katie L. · Answer

@Joe Polyak

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 be deemed to be "doing business" in California and therefore 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 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 will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don’t buy CA property.  You are buying CA property, meaning, you are subjecting yourself to additional fees in WY that you would be able to avoid if you just formed a CA LLC.

Will you be having debt against the property?  Otherwise, taking title in your individual name and transferring to an LLC could trigger a due on transfer clause potentially.

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.

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 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. This is particularly so since you are entering into this transaction with several unrelated parties.  If you have a disagreement or one person wants out of the LLC, you likely will want to go to CA court to have that adjudicated since you're all in California and have your operating agreement governed by CA laws.

But, of course, 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.

Buying CA property using Wyoming LLC that owns CA LLC, good idea?

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