Hi everyone,
I've been doing plenty of research on this topic and thought it was time to seek some outside advice. I've owned a 4-plex property in Long Beach, California. So my following questions are.
1. I work full time (W-2) how does an LLC on the property affect my tax situation?
2. Does forming an LLC in Wyoming and Nevada for my California investment a good idea?
4. Will forming an LLC make getting loans from a bank difficult? If so, is there other ways around this?
I really appreciate your time.
Thank you,
John H.
Yes it will make getting loans difficult. For the rest of your questions, I would 5000% ask your [hopefully investor-friendly] accountant. None of those questions can be answered by just anybody, partially because most people don't really know, and partially because every situation is different and your accountant is the one who will know all the numbers and logistics at play, and the potential impact to your income. Working full-time/W-2 doesn't matter, your actual income from that W-2 matters. Your accountant should be involved. But as a side bar, starting the LLCs in states other than California won't get you out of the $800/year LLC fee in California.
You didn't ask general opinions about whether you should form an LLC or not, but in case that's still in question, here's why I didn't go the LLC route (I also live in CA)-
https://www.biggerpockets.com/blog/2013/08/17/rent...
Hope that helps.
Yes it will make getting loans difficult. For the rest of your questions, I would 5000% ask your [hopefully investor-friendly] accountant. None of those questions can be answered by just anybody, partially because most people don't really know, and partially because every situation is different and your accountant is the one who will know all the numbers and logistics at play, and the potential impact to your income. Working full-time/W-2 doesn't matter, your actual income from that W-2 matters. Your accountant should be involved. But as a side bar, starting the LLCs in states other than California won't get you out of the $800/year LLC fee in California.
You didn't ask general opinions about whether you should form an LLC or not, but in case that's still in question, here's why I didn't go the LLC route (I also live in CA)-
https://www.biggerpockets.com/blog/2013/08/17/rent...
Hope that helps.
Hi everyone,
I've been doing plenty of research on this topic and thought it was time to seek some outside advice. I've owned a 4-plex property in Long Beach, California. So my following questions are.
1. I work full time (W-2) how does an LLC on the property affect my tax situation?
2. Does forming an LLC in Wyoming and Nevada for my California investment a good idea?
4. Will forming an LLC make getting loans from a bank difficult? If so, is there other ways around this?
I really appreciate your time.
Thank you,
John H.
John
An LLC is a pass through entity so it is taxed on the individual level not on an entity level. If you are the sole member of the LLC it will be treated as a disregarded entity by the IRS and treated like a sole proprietorship for tax purposes. If You currently own the apartment building, it really shouldn't make a difference for tax purposes.
Ideally you want to form the LLC in the state where the property is located to get the best asset protection. You would want to consult with your personal tax advisor regarding anything more complicated such as a Nevada corporation or Delaware trust, etc.
In regards to forming an LLC and getting a loan The answer is, it depends. If you buy anything from a single-family to a four family, and you use traditional financing through a bank that has been remarket it through Fannie or Freddie, there are often loan covenants that State you must be an individual on the loan. This means, you must acquire the property in your individual capacity. Many times, investors well then subsequently move the property into an LLC. Well technically a loan violation, 99.99% of the time the bank is going to do nothing about it because you are still personally guaranteed on the loan. Therefore, it's just one minor hoop to jump through to get the property into an LLC. Now, if you're looking at a commercial loan and commercial bank financing, the bank will not have a problem with you taking the property directly to the LLC from the start because, they are going to make you personally guarantee the loan anyway
Hi John,
For the first 2 questions you will need to ask your CPA. Forming an LLC can make your first deal or two a little difficult, but if you have a strong relationship with a local bank then it can be a lot easier. Keep in mind that those loans with be full recourse (you have to personally guarantee them).
Other food for though would be, if you decide to get into larger deals with loan balances over the $1MM then you can get non-recourse agency loans and it would be unusual for it NOT to be in an LLC.
For CA investors you can create a LLC BUT California will exercise a hefty franchise tax of $800 per year. The best way around this problem is to use a Delaware Statutory Trust (DST) instead. It may be worth the time to investigate this as a possibility for you.
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.
The Delaware Act expressly provides that “[n]o creditor of the beneficial owner shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the statutory trust.” 12 Del. C. §3805(b). The title to trust property may be vested in one or more trustees, but shall not be subject to claims against the trustee which are unrelated to the statutory trust.
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 will solid investment into an entity that can separate out your assets.
This isn't legal advice, just my opinion as a real estate investor. If you have any other questions I am happy to help.
- Scott
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.
Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. Even if you form in another state, you will need to pay this tax. Aside from that, the tax treatment is largely the same. You may need to file a partnership tax return if you form an LLC and either have multiple owners or do not wish to be treated as a disregarded entity.
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.
Obtaining a loan in an LLC can be difficult, but not impossible. Some banks allow it if the owner gives a personal guaranty. You'll also find it is more likely that a smaller, regional bank may offer the loan that a larger institution.
You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.
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.
*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.