Newbie Real Estate Investor - Legal & Accounting

[Account Closed]

Hello!

My name is Derek and I am an aspiring real estate investor currently living in San Jose, CA. I have put in countless hours of self-education, and now I'm looking to take that extra step by connecting with experienced professionals who can help me close my first deal!! I have come to the conclusion that investing in a rental property out-of-state will likely be my best bet.

To start, I am hoping to receive some general advice/recommendations when it comes to setting up my business/filing taxes/accounting/etc. If you are an accountant or attorney that specializes in real estate investing (specifically rental properties), I would love if you reached out and connected with me. I would greatly appreciate the opportunity to pick your brain and, if it is a good fit, utilize your services in the near future.  

Below are some general questions that, if answered, would begin to steer me in the right direction:

1. As a first time investor, is it recommended that I have an LLC established? If so, is it best to file for this LLC in California or in the state which I plan to invest in?

2. If I were to invest in a rental property out-of-state, should I be working with an accountant and attorney in that state?

Again, if you are an attorney or accountant, please connect! 

I look forward to networking with you all and I hope to be an asset to the community!

Best,

Derek Wilson

[Katie L.]

@Account Closed

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.

Any lawsuits would 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). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure 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.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

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 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.

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 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.

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.  California generally has more complicated taxes than other states, and as a CA resident, you will be taxed on all your income in CA versus just the nonresident income in the other state, that you either want a CA-based CPA, or one who is familiar with CA laws and prepares several CA returns.

*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.