LLC for one property?

[Toan Pham]

I know the general consensus is that you should have an LLC for protection but I was wondering if anyone decided to forego an LLC (for maybe an umbrella policy) when they had a single property? I'm in California so LLC fees are $800 annually I believe, not to mention any associated lawyer fees to set it up. Does anyone have experience with an alternate route when they had a single property? I know an umbrella policy has a lot of risks as well and could be just as costly but I'm just trying to explore as many routes as I can.

[Kevin Romines]

I'm not sure if it has been mentioned here, but one major reason to consider setting up an entity even for one property, is to avoid a dealers status by the IRS down the road. If you have passive income through rentals, or lease options / contracts and you also flip some properties, the IRS could come along and classify all your real estate dealings as dealer status.

This will then cause you to be taxed as ordinary income. You may also have to pay self employment income tax and you will lose the ability to deduct depreciation and do 1031 exchanges. This can also be done retroactively by the IRS. All bad things to have happen to you?

The best way to avoid this is to set up separate entities that only hold properties of like kind transactions. Passive in one entity, flipping in another.

I know it may be hard to look down the road and determine what your future plans are, but best to error on the side of caution and set up the entity just incase you decide to use different strategies later on?