I am in CA but properties are in OK

[Mark Buchheim]

I live in Los Angeles, CA and I have 8 properties in Yukon, OK. The loans and title of the properties are under me personally. I have a CA LLC that I have run the income and expenses of those OK properties through. I file both a CA and OK tax return every year, but never registered the CA LLC in OK. I typically just break even every year as the main investment strategy with these properties is to pay down the mortgage aggressively to eventually get to full cash flow potential.

The questions I have are:

1) Should I even continue to run the income and expenses through the LLC in general.

2) Should I hold title on those properties in a different manner than personally and can I do a change without having to refinance?

3) If I should still run the income and expenses through an LLC, should I just create the OK LLC and be an out-of-state member as opposed to being a CA LLC operating in OK?

4) If I should still run the income and expenses through an LLC, and that LLC should be based in CA, then is it a requirement to also register in OK if all I am doing is managing real estate rentals in the state?

[Katie L.]

@Mark Buchheim

When you say you run the income and expenses through an LLC, you mean the income and expenses from these properties that you own personally? The LLC does not own any properties? If the LLC has no assets, why do you run them through an LLC... and how do you do that exactly?

California is a sort of beastly state 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 be deemed to be "doing business" in California and therefore 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 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 will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property.

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention. If you hold title to your properties individually right now and not within an LLC, you may want to consider an umbrella policy if you do not have one already.

Many loans have due on sale/due on transfer clauses that transferring the property to the LLC could allow the lender to call the loan due. Sometimes lenders will never call it, and sometimes lenders will approve the transfer if you provide a personal guaranty.

These are all things you will want to talk about with your attorney who knows the full scope of your situation and can give you personal 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.