Best state for holding LLC for taxes?

Question

My wife and I have the strategy of owning investment properties under LLCs formed in the state each property is within and want to place all these LLCs within the ownership of one holding LLC.  We live in California in a home we own but don’t intend to own investment properties or any of those LLCs in our own California state.  This holding LLC will be split between my wife and I and nobody else.

I know Wyoming is fantastic for liability protection but we are also, and more eagerly, looking for the best for tax benefits from depreciation write offs, expense write offs, and taxes from cashflow from all the LLCs that’ll be under it.

Would Wyoming provide just as good of tax benefits as other stats or is there another state that’s better with investment real estate tax benefits, especially with owners from California?

Thanks for your time and insight!

Christopher Smith · Answer

Regardless of where you form them they will very likely need to be registered as foreign LLCs with CA which will cost you $800 per LLC, per year (at a minimum). That's going to get mighty expensive mighty fast.

Arlan Potter · Answer

@Chris KirkmanWhere did you hear about all this sort of stuff.  If I had thought about all that, I would never have bought a rental. Go buy some houses and see if you like it. Why get all worked up about LLCs, get into it to see if REI is for you.

My wife and I owned over 50 properties before we ever set up an LLC.

Katie L. · Answer

@Chris Kirkman Have you registered each of these out-of-state LLCs with California? California does not recognize series LLCs and if you are managing them from CA, chances are you are "doing business" in CA and therefore subject to the $800 minimum tax PER entity. This is a separate tax, totally unrelated to the income tax that you pay on the rental income on your personal tax return. Are your LLCs disregarded entities or do they file partnership tax returns? Do you file out of state nonresident income tax returns in the states where the properties are located? As a California resident, you will be taxed on all your income, and given an offsetting credit for taxes paid to other states. Sometimes states follow the federal laws in terms of things like depreciation, and sometimes the states do not conform or have not gotten around to mirroring the federal laws. As California residents though, you will have a hard time escaping CA taxes. I think you would benefit from talking to an experienced CPA and/or attorney. Let me know if you need references in San Diego.

*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 are advised to seek professional advice.

*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 are advised to seek professional advice.

Account Closed · Answer

For taxes it matters where your primary residence is (where you file taxes), not the LLCs.  I used to live in SF and have all my rentals in TX, but paid CA taxes on any rental income even though property (and LLC) was in TX. Could not wait to get out of California.

Katie L. · Answer

Agree - CA does not recognize series LLCs, as I stated in my post.  Did you mean to tag the initial drafter in your post?  Thanks.

Jana Cain · Answer

@Chris Kirkman Can you shed some light on what you've heard about possible tax benefits based on the state where the LLC is incorporated? LLC tax returns are basically a P&L to determine if you owe any additional fees on top of the annual fee for that state (tax rates and thresholds vary by state). It becomes a "how much do I pay to maintain the LLC in " question, vs a "I get additional tax benefits (e.g. deductions) because the LLC is incorporated in ". That said, there could be state-based incentives for corporations who do business in those states, but that would be applied on the state return that accompanies your federal corporate return (partnership or corporation), which is different than the LLC return. If you and your wife are the only members of these LLCs and file a joint return, the IRS is inclined to disregard them as separate entities anyways, so my previous point about corporate tax benefits would be moot, as all activities of these LLCs would be captured on your individual tax return, not a corporate return. If you haven't done so already, it could be worthwhile to explore this with a hired tax pro so you can get into all of the details of your situation to determine what truly is most tax advantageous for you. There's no single "this is the best tax-advantaged state for an LLC" answer that would apply to all tax situations.

Chris Kirkman · Answer

@Caleb Heimsoth I believe those fees are write-offs and aren’t they less expensive, time consuming, and stressful than losing my house or other properties from a lawsuit?

Caleb Heimsoth · Answer

@Chris Kirkman. Make sure you understand the cost to maintain these LLCs.  For example Wyoming will charge you 50 per year, California another 800 and the state of Nevada 500.  Per year, per llc.

To be frank, this is a bad idea for you, you’ll spend a fortune maintaining it.  Your lawyer will thank you though for all the fees.

Eamonn McElroy · Answer

@Chris Kirkman

LLCs are generally not user friendly for CA residents from a tax and overhead perspective.

I think what Caleb is saying, and I think we all agree with him, is that there's a cost-benefit for LLCs.  Most of the time that cost benefit is positive, especially for GA residents where they only cost $100 to form and $50 annually thereafter to maintain.  For CA residents, it's much harder to get that positive cost-benefit if you are the manager of the LLC as you get hit with the $800 annual CA LLC tax, and have to registration costs in two states (assuming you organize outside of CA as you seem to want to do).

What are you going to put in this LLC?  A $100-200k property in the Midwest, or $1 million plus of real estate?

If the former it's very likely the structure you're proposing will eat up a significant portion of monthly cash flow, perhaps all of it and then some.

If the latter go for it, but please engage an actual attorney to structure this.  When people try to save pennies on professional advice they usually end up spending dollars 2-3 years down the road.

Eamonn McElroy · Answer

@Chris Kirkman

"Asset protection is hugely important, and that’s most if the reason to hold property in an entity to begin with, but I’d rather use another state if the government has provided hugely more benefits firming in another state than Wyoming or Nevada."

I'm not an attorney, so take what I'm about to say with a grain of salt...

If you're going to self-manage, it's my understanding an LLC does not provide you with asset protection as you're liable for torts you commit and damages you're responsible for in your own capacity as an individual/manager.

Adequate and appropriate insurance here is much more appropriate here than a legal entity, but that doesn't mean a legal entity is not important.

There are quite a few good asset protection attorneys here on Biggerpockets.  I would interview a few, pick one, and engage him/her for their time to tailor-fit an asset protection strategy if your assets are substantial and you're serious about asset protection and growing your real estate portfolio, rather creating a legal entity structure with free internet advice that a first year law student could poke holes through...

Best state for holding LLC for taxes?

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