How to roll up Individual LLCs into a Wyoming Holding LLC

[Mark C.]

I want to get into real estate investing.  Here is my plan and then my questions below:

1) I want to buy single family homes across various states with each home having its own LLC in that particular state.

2) I want these various LLCs to be owned by a Wyoming Holding LLC for anonymity.

Here are my questions:

a) Is it really as easy as creating a Wyoming Holding LLC online (e.g. zen business) and then creating an LLC for the homes in the relevant state (again using zen business as an example) ?

b) How do the taxes work?  If I have three rental properties in three different states, where are taxes paid?

c) Can income (rents paid to me) and expenses (e.g. electrician) be paid directly to the holding company?  Is that tax efficient?

d) Is there a good CPA firm that can handle all of this for me?

thanks!

[Chris Seveney]

@Mark C.

You are going to create a tax and accounting nightmare

You will pay taxes in each state you own property (typically) a

Thus each LLC will need to file in that state then you roll up to you which just adds more expense to your tax returns

You will end up spending thousands of dollars per year to get taxes done which will eat any cash flow from making it so complex

Keep it simple

[Benjamin Weinhart]

Agreed with Chris. I'm getting a lot of folks who are looking at a similar path or who may have already done it and don't realize all the added compliance. Unless you're filing the tax returns yourself (not possible to e-file a partnership return if not a preparer), then the cost is usually a large barrier for a lot of people as they're starting out. This is likely something you'd want to revisit in 10 years rather than now.

I know you mentioned the anonymity portion, is this worth potentially spending $2-3k per year or more for? And that's not including any extra state tax you might pay.

[Fulton Abraham Sanchez]

Quote from @Mark C.:

I want to get into real estate investing.  Here is my plan and then my questions below:

1) I want to buy single family homes across various states with each home having its own LLC in that particular state.

2) I want these various LLCs to be owned by a Wyoming Holding LLC for anonymity.

Here are my questions:

a) Is it really as easy as creating a Wyoming Holding LLC online (e.g. zen business) and then creating an LLC for the homes in the relevant state (again using zen business as an example) ?

b) How do the taxes work?  If I have three rental properties in three different states, where are taxes paid?

c) Can income (rents paid to me) and expenses (e.g. electrician) be paid directly to the holding company?  Is that tax efficient?

d) Is there a good CPA firm that can handle all of this for me?

thanks!

Mark, hi. It may seem overwhelming, but you are not alone, we are a community of real estate investors and active CPAs assisting real estate investors nationwide with their tax planning and business structure. Feel free to reach out to one of us with your inquiries. Preferably by email as we are not allow to self promote. 

[Kory Reynolds]

Keep it simple.  Perhaps even just own the real estate under your own name while you are getting started and get a good insurance policy on the property.  Then go and get a good umbrella policy personally.  Really...no matter what happens,  your insurance policy is your first line defense and best defense.  If something goes sideways, I would be willing to bet 90% of these single owner LLCs formed for "asset protection" would be easily accused of piercing the corporate veil, and collapses the whole thing anyways.

Depending on the state you are operating in, even if you use a Wyoming formed LLC, you will likely be required to register in the state you are operating in, which may require disclosure of that information you don't want to give up already - check to see what those states require for disclosures when registering a "foreign" LLC that is operating in the state.

Literally no federal income tax benefits to where your LLC is registered. In some cases it can cause some state tax headaches to have a new LLC set up for every property (my home state of NH makes it a compliance bear). So you are introducing a lot more complexity for anonymity, and nothing else. Decide if that is worth it to you.

The short answer to your questions:

1) Okay

2) Okay, you can certainly do that. If you have an LLC wholly owned by you, which then wholly a owns 3 separate LLCs, that whole structure is disregarded for federal tax purposes.

a) It can be that easy. If you want your LLC to be respected for liability purposes, it should have an operating agreement, bank account (so an EIN) (this will also require disclosures to the bank on your identity), and for you to full respect it as a separate entity from yourself. Don't use it as a piggy bank, keep separate books and records, keep a proper accounting for credit card charges /etc, try not to collect rental payments on behalf...it goes on.

b) All three will be subject to income taxes in your resident state.  Each will separately be subject to income taxes in whatever state they are operating in, assuming each has an income tax.  If you pay taxes in any of those states, you'll typically get a credit against your home state taxes so you aren't being double taxed.  IE your rental incurred $1000 in taxes in the nonresident state, and incurred $1,200 in taxes in the resident state - you'll get a $1,000 credit to your home state, so your total out of pocket tax paid is $1,000 to the nonresident state, and $200 to your home state.

[Costin I.]

@Mark C. Here is my free advice 2U, worth 2¢: You "want to get into real estate investing". And you just joined BP this May. You are a beginner in REI – so get started first, accumulate some equity, get some serious cashflow going, get some experience with managing real estate, figure out you want to do this long term…and then worry about how to layer an LLC cake. You are about 3-5 years early for this question.

Unless you already have some other serious reasons to start with asset protection, maybe you are filthy rich, or have partners, in which case free advice from a public forum might not be the best for you (and asking about Zen business for LLC creation tells me it's not the case).

Another 2¢ bonus for you:

1. - LLC as asset-holding entities are pass-through disregarded entities, with little to none tax benefits. They should just hold the assets and do nothing else.
2. - You want a separate shell LLC (one that doesn't hold any asset and is barely properly capitalized), to use for all public interfacing, contractors, tenants, payments, rents, rehabs, repairs, etc.

[Mark C.]

wow.   this is gold!   thank you!  Yeah I am not wealthy at all.But I want to be one day!

[Bill B.]

Quick question to someone who has actually gone this path. I assume you have to get the mortgage in your own name as you can't get one in the name of the new LLC. Even if you got a dscr loan you'd pay a couple percent more. (Possibly an extra $8-10k per year per property in interest.)

If you get that loan in your name is it not recorded on the county website? I swear I can look up the recording documents on my county assessor’s website. 

[Costin I.]

@Bill B. @Mark C. - liability (LLC), anonymity (land trust) and financing are 3 different components of this. Or tools, among a lot others, that you should have in your REI toolbox and learn how they influence each other and how to use them.

DSCR is about a non-recourse loan (secured by the property and the property performance, not by the personal guarantee). DSCR doesn't offer any liability or anonymity protection, other than the fact the loan note itself is a form of asset protection (because there is usually little to none equity in the property to take from the owner).

Here are some graphical helpers to assist in the quest of answers on this subject:

Asset Protection Decision Diagram - to help assess the need for asset protection, and what to implement : https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram

Asset Protection Onion Diagram - what, when and at what cost one should implement in terms of asset protection - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2

What is needed for complete asset protection OR the domains that need to be intersected to find asset protection. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram

How a fully implemented asset protection layout might look. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures

Let me know if have questions or want to chat further - I can give you my investor perspective.