Personal Use of Investment Property with MMLLC

[Marc Villiaer]

I was hoping I might be able to get some thoughts from the community around a potential real estate investment I’m considering making. Here is the general scenario:

• Establishing a multi-member LLC in which my spouse and I will be the members. The LLC will be taxed as a partnership and will not be considered as a disregarded entity for IRS purposes.
• The asset we are purchasing will be a condo in Colorado (we live in CA). The LLC will purchase the real estate asset and we have a lender that will be providing the loan (we are personally guaranteeing).
• We intend the property to generate rental income as well as capital appreciation over time. We will rent out to third-parties and will also utilize the property around our vacations (with the intent to pay market rent to the LLC).
• We would expect the property to generate a tax loss (largely as a result of depreciation expenses). We have sufficient passive income in which to utilize the passive losses that are generated by this real estate investment.
• I’m already capped on interest rate deductibility and property taxes as a result of my primary residence.

Questions:

• Since the FTB in California will charge an $800 annual fee for being a member of a LLC irrespective of whether it is an in-state or out-of-state LLC, seems like it would be easier just to form the LLC in CA?
• Since this structure should be treated as an investment property as opposed to a second home, are there any limitations in our personal use so long that we pay market rents?
• What other considerations should I be thinking about?