What state is the best to open an LLC for real estate investment

Question

I have a new business my family is creating for real estate investment. We are going to focus on small multi-family first, and then  get into large multi-family. Where is the best state to open an LLC for this purpose? The first purchases are likely going to be California, Montana, and Texas. Thanks.

Max Gradowitz · Answer

I'm in CA and the most common LLC-related question I get is "I live in CA, I want to buy properties in other states, what state should I open an LLC in so I can save money?"

I don't know what state you live in, but if you live in CA and own rentals anywhere, you have to have a CA LLC. In CA, you are legally required to have a CA LLC if you are "conducting business in CA". Even if you own a property in TX, you are conducting business in CA because you live here, collect the income here, etc. If you do have a TX LLC just to hold a TX property, you still have to register in CA as a foreign LLC, which still means paying the CA LLC tax. So there's no point in having an out of state LLC in that scenario.

I would imagine other states have similar laws, but I do not know for sure. You should consult a business attorney in your state regarding this. But my point is that it's not as simple as just finding the cheapest LLC state and opening an LLC there just to save money. There are no free lunches man.

Roland VanLoan · Answer

Katie and Mohamed,

Thank you both for your answers!

Roland VanLoan · Answer

Hi Mohamed, I live in CA and am acquiring a duplex rental property in Ohio (my first investment).  Per your advice, I should setup the LLC in OH.  However, I have seen other replies on this thread that state that I will have to pay the $800 CA tax anyway as a registered foreign LLC.  Do you know if that is accurate?  In that case, it seems like I may as well setup just one LLC - in CA  - and use that LLC to take title to all of my rentals, regardless of what state they're in.  Would you agree?

Thank you!

Max Gradowitz · Answer

This is correct. I should have clarified, you have to register your out of state LLC as a foreign LLC in CA, and pay the CA LLC tax anyway.

Jason Malabute · Answer

If you’re planning to do business in California, it doesn’t really matter where you set up your LLC — California will still want their money. This is a common misconception. Even if you form your LLC in another state like Montana or Texas, if you’re operating, managing, or generating income from properties in California, the state will require you to register as a foreign LLC and pay the $800 annual franchise tax, among other requirements.

Maggie Wegman · Answer

So can I clarify something? If I live in California and purchase a rental property in another state. I have to pay for the California lLC. Is there any point in purchasing an LLC in the other state also? It just sounds like a waste of money and yet I hear so money YouTubers saying to purchase in other states. Maybe they do not live in California! (?)

Mohamed Youssef · Answer

Yes, CA rules are very strict and not tax-friendly for residents who own businesses in other states. It's usually advisable to form an LLC in the state where the asset is located for better legal and liability protection.

Mohamed Youssef · Answer

@Roland VanLoan

I agree with @Katie Balatbat answer above. CA's definition of "doing business" for foreign entities includes maintaining a physical office, employing staff, or meeting the economic nexus, also, broadly asserted that any LLC with members, managers or agents conducting activities in CA on behalf of the LLC, would trigger registration requirements.

Katie Balatbat · Answer

@Roland VanLoan

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.

Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. CA taxes residents on worldwide income but may provide a credit for taxes paid to other states.

Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.  Of course, with all things, the answers to all these matters will depend on the circumstances.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts.  It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC.  Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner and/or spouse live in CA, you probably want to arbitrate in CA if the two of you had a disagreement.  It may also make it easier for your estate planning attorney to line up ownership with your estate plan, assuming a CA-estate plan if a CA resident.  But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

*This post is informational only and 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.

Mohamed Youssef · Answer

Hello, the State to incorporate is usually the same where the property is located. Usually, a single-member LLC to avoid filing separate tax returns. If you have multiple members it will be treated as a partnership and will require a separate tax return.

What state is the best to open an LLC for real estate investment

Most Popular Reply