LLC set-up: in state where property is located or where I live?

Question

Hello BP Forum

I (presently) live in Westchester, NY and I have a SFH that lease out in Charlotte, NC.  I bought it when I lived there.  I would like to expand my holding over the next few years; I am considering purchasing more units - possibly in Charlotte but could be anywhere in NC or outside the state - depending on the deals.

I've looked around on the forum for some specific answers and find some that are close, but not precisely this situation.  So figured I'd ask my questions  regarding setting up a LLC:

• Is there any benefit to me setting up a LLC for this home?  When I purchase more units does the situation regarding an LLC change in any way?
• Should I set up the LLC for the state where the property is located (NC) or where I live (NY)?

Thank you very much

Russell

Natalie Kolodij · Answer

Generally you want it in the state where you're earning money- IE where the rental is.

But lots of people do a holding entity, or series LLC. There are multiple options for setup.

Taxwise LLC= no benefits.

It just creates a shield legally.

If you purchase in your name and move the property to the LLC the bank could call the loan.

Or if you finance it in the LLC it will be commercial rates and a little higher.

Goodluck!

Scott Smith · Answer

The use of LLCs would be more for asset protection than for taxes, but if you plan this stuff appropriately your entity structure should streamline your strategy. I often break it down into the "five pillars" of protecting your assets. The first pillar is making good decisions: limiting high liability activities, ensuring properties are well maintained and not being a jerk to tenants and partners. The second pillar is a good insurance policy as that covers the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The fourth pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

• The LLC, when established correctly, would create a legal stop-gap between the investment and you and your personal assets. You can also establish LLC's in different ways for tax purposes - but that doesn't always apply and takes extra measures. If you decided to go the route of the Series LLC you would need to form it in one of the states that offer the entity as New York does not offer it, yet, though many investors from New York utilize it employing different strategies - but this gets us pretty far off topic.
• You would generally be encouraged to file in the same state for a few reasons. Unless you specifically had a reason not to file the LLC in the state of the property - say you want to work with a single Series LLC, or there are costs/benefits of using your home state - it would be common practice to have it in the state of the investment.

Russell R. · Answer

Thank you @Natalie Kolodij - super fast and helpful.

Scott Smith · Answer

To avoid issues with the title insurance and title chain you would want to use a Warranty Deed.

Steve Vaughan · Answer

Back door transfers of little houses with mortgages on them is a good way to streamline problems.   What type of deed to convey?  Quitclaim? Brilliant. Title insurance and title chain issues.  Hazard insurance is in your name but you will no longer own it.  On and on, stuff not discussed by 'professionals'.

Search 'I transferred my rental house into an LLC and am now totally screwed.'

Jared W Smith · Answer

@Russell R. Though @Natalie Kolodij is correct, this can get very complex. I would contact a local CPA/tax or entity attorney for assistance on the best route for you.

LLC set-up: in state where property is located or where I live?

Most Popular Reply