All Forum Posts by: Gin Zhuang

Putting your California rental into an LLC rarely makes sense. The LLC doesn't create new deductions, rental income and expenses still flow through to your tax return the same way. However, California imposes an $800 annual franchise tax, plus an additional gross receipts fee if rental income exceeds $250,000. That means you're paying extra each year without gaining any direct benefit.

On the liability side, an LLC can provide separation between you and the property, but in California courts it's easier to "pierce the veil" if you don't keep up with formalities. For most landlords, it's more practical to rely on landlord insurance plus an umbrella policy, which is both stronger in practice and much cheaper to maintain than an LLC.

In short, for a single rental or small portfolio, keeping the property in your name with solid insurance coverage is typically the most tax-efficient choice. An LLC adds cost without reducing taxes, so unless there are broader liability or estate planning goals, it generally doesn't improve your overall tax position.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Certainly a bit biased here, but we would strongly recommend setting up LLCs for the properties, and ideally pairing them with a holding company in WY, DE, or NV to fully separate the risks and liabilities of each of the properties from your own personal liability, and vice versa. Your best protection will come by having each property in it's own LLC as well, though at minimum one per state. The goal of insurance is to accept your money and not make any payments out, whereas a structure of LLCs is designed and owned 100% by you and for your protection. FL and CA are each a bit of a unique scenario as well, so if you want to reach out directly, I'm happy to talk one-on-one about the details.

This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No CPA-client, fiduciary, or professional relationship is established through this communication.

@Gin Zhuang due on sale clause is definitely tricky. The better way to do it is It reach out to your bank and see if they'd allow you to do it . Better to ask for permission than beg for forgiveness on this one. I've had a couple of my clients successfully do this by asking first and explaining to the bank what they were looking to do 

Hello Gin,

I hope you're doing well. Generally, it will depend on what kind of loan a person may have with your Lender. Many Lenders that are compliant with Fannie Mae and Freddie Mac may not be concerned if they transfer the property directly into an LLC. However, if the loan is not a traditional loan, then the Lender may utilize the transfer as a justification to trigger the due-on-sale/acceleration provisions even if a person is the only member of the California LLC.

One work around many individuals use are Revocable Grantor Trusts (often times called land trusts) which act like Living Trusts. Transfers of residential property, even if it is for investment purposes, into a Revocable Grantor Trust is exempt from acceleration, but not for any properties classified as commercial. It is the same reason how people can transfer their properties into Wills or Living Trusts without triggering automatically the Due-on-Sale clauses. A person could transfer the property into a Land Trust and then because it is a private document have the beneficial interest assigned to the California LLC for asset protection, all while gaining some anonymity and avoiding reassessment with the proper exemptions being filed when the property is deeded into the trust.

Please let me know if you have any questions with regards to it.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

 Not true if you do it right but also not dispositive to the question. Get a GOOD insurance policy.

Piercing the corporate veil is dependent on the owner of the LLC. If you commingle funds, then you've already pierced the veil on any LLC, whether it's in California or Texas.

As noted above, there may be an $800 LLC fee. I would look to see if you can structure things in a way that has you as the only member in the LLC.

@Gin Zhuang

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. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more involved 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 may be deemed to be "doing business" in California and therefore maybe 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 may 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 may need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should in theory 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, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted. If you have a loan, you may wish to look into due-on-transfer clauses.

If you're going the umbrella insurance route, perhaps see if 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.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs. You'll also want to coordinate with your estate plan, and consider getting an estate plan if you do not yet have one in place.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*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 should seek professional advice.