1 Property, 3 doors - should we set up a Real Estate LLC?

Question

Hello folks, I'm new to the forums and thank you in advance for your thoughts. My spouse and I purchased a home in Nov 2023 (that we will move into in about 1.5 years), that has an additional 2 bedroom apartment and 1 bedroom studio on the property. We are renting all 3 units currently, while living in another home that we co-own with a friend. It's in the Grass Valley area, CA, about an hour north of Sacramento.

We have been considering opening a Real Estate LLC to support with this and possible future investment interests. The questions I have so far:

1. If we opened the LLC, would/could we transfer the ownership of the property to the LLC?

2. What would be the logistics of that if so?

3. Are there notable pros/cons to getting the property under an LLC compared to regular homeownership (us)

4. What else should we be taking into consideration here if anything?

Thank you!

Katie Balatbat · Answer

@Fetch Phoenix

It sounds as though this is all one parcel of real estate?  If so, the title to the parcel either is 100% in the LLC or 100% outside of the LLC?  In that case, you'll strongly want to consider what putting personal-use property inside of an otherwise business-use LLC would do to the liability shield, as well as insurance and tax reporting.

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.  Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states 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 as a CA resident.

Any lawsuits should 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, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC.   Or, a charging order may be granted.  If you have a loan, you may wish to look into due-on-transfer clauses.

If you're going the umbrella insurance route, perhaps see if 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 could 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.  California does not recognize series LLCs.  You'll also want to coordinate with your estate plan, and consider getting an estate plan if you do not yet have one in place.

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.

Marc Winter · Answer

@Jonathan Bock makes some good points.

One way to bypass the Probate hole is to put the properties in an intervivos revocable trust.  No transfer tax should be involved (see Garn/StGermain) as opposed to an LLC transfer.  It may also help keep the litigation target off your back.

As always, check with your competent legal counsel--not all attorneys speak fluent "trust function and formation".

Fetch Phoenix · Answer

I just wanted to give a quick thank you to all that have responded. I'm going through them each with consideration.

Thank you!

Sarah Brown · Answer

Being that you are in CA, you might want to consult with someone there.  My understanding of CA LLC's is that they are very high cost to start and maintain.  They also don't quite provide the protection that you might be hoping for.  There might be better options for protecting you and your investment than an LLC.

Jonathan Bock · Answer

Consider your compliance costs especially for CA.

Probate in CA is another item last I've heard its around 46K fee for a 1 mil gross estate.

The LLC is "it depends" go through the advantages and disadvantages and look into getting your estate plan put in place too.

I'll take having a health care directive over 10 LLC's any day.

Probably about 10,000 posts on this topic so you can go down every rabbit hole.

Fetch Phoenix · Answer

Thanks folks, it seems like overall it doesn’t make the most sense to start an LLC for real estate purposes due the cost and complexity, with few benefits here in California. That instead solid insurance should be just fine.

Appreciate the feedback!

Michael Smythe · Answer

@Fetch Phoenix why do you want an LLC?

For asset protection, LLCs are over-hyped - you just need good insurance.

Set up correctly, an LLC may give you decent anonymity, so tenants don't know you're the owner and can't track you down to retaliate (happened to my manager).

LLCs are pretty expensive in California and so, may not be worth it.

Scott Scoville · Answer

Hey Fetch, welcome to the forums. Be happy to chat about this further over the phone anytime. I'm an investor and have multiple LLC's for my properties in Sacramento. I'm not an attorney, but can share what's worked for me. DM me anytime.

Aristotle Kumpis · Answer

Hey Fetch. I'm not an attorney, but here are some things to think about. Yes, you can create an LLC and deed the property from your name into the LLC. It's quite easy to setup. And the main reason that people place investment property into an LLC is for anonymity. So if someone looked up your property, your name would not be listed. But since you are in California, a land trust might be a better route. Tell me more about what it is that you are trying to accomplish? Is it to protect you in case of a lawsuit?

1 Property, 3 doors - should we set up a Real Estate LLC?

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