California Investors Prepare to Pay, UNLESS …

[Brian Bradley]

The cold hard truth is that if you are a CA resident and invest in real estate and own or plan to own multiple investment properties, and you set up an LLC to hold that asset, ANY state that you own property in and any state that you incorporate your company in, even if outside the State of CA, you will have to pay CA Franchise Taxes on it. Another cold hard truth is that if you create separate LLCs for each of those assets, you will be paying maintenance tax and franchise tax’s on EACH of those LLCs. Eating into your cashflow. Another cold hard truth is that if you are a CA resident, and create a Series LLC, in another State, CA will still charge you a franchise tax on EACH child series you create. The more children "series" you add, thats another $800 franchise tax to the State of CA. Again, more cash flow loss. 

HOWEVER, here is how you can legally work around and limit the CA Franchise Tax as a Real Estate Investor who wants the asset protection benefit of creating child series to place each asset in. Its is called the Delaware Statutory Trust Act 12 Del.C. section 3801 (1988). We will call the the (DST) to make it simple.

The benefits of the DST as a Asset Protection system, and particularly for those CA investors is that you can Series out your properties into child series like with Series LLCs, without paying the $800 Franchise Tax for each child series. The (DST)  is a Business Trust, and allows for the Series structure like protection of a Series LLC.

Again, this is not an investment DST for in institutional investing, but rather a Business Trust DST, and to keep that classification of a trust by the IRS, it must maintain strict compliance or the asset protection structure will collapse. This is where working with your team CPA and Lawyer are a must. There are lots of other purposes of DST. Some use for 1031 exchange's, some use as an investment tool to as accredited investors in institutional investments, etc etc. This is not what this forum is about. This is about the DST for Asset Protection as a trust asset holding company.

Some of the code sections regulating the DST are:

12 Del.C. 380; IRC Section 301.7701-4(a); 

Senate Bill No. 355, 66 Del. Laws Ch. 279 (1988); 

IRC Section 301.7701-4(a);

California's Revenue and Taxation Code (R&TC) section 23101; 

California law, specifically Public Law 86-272. 

[Matt Ward]

@Brian Bradley seems like you are dramatizing the CA tax liability a bit. While it is steeper than other states, in the bigger picture, it's just $800/yr per LLC....