All Forum Posts by: Katie Balatbat

@Nick Knoblach

Of course, you should always confirm with your own CPA who is familiar with your situation, but here's a few generalities:

- CA taxes residents on worldwide income, so the CA resident will likely be taxed on the entirety of income that he/she receives on his/her CA resident tax return, including his/her share of rental income

- CA will likely want to collect tax on all income earned in CA due to CA-sitused real property, so any non-residents in CA should likely be prepared to file a non-resident income tax return in CA to report his/her share of income earned from the CA real property

-I'm not familiar with MN rules, but most states generally allow for a credit for taxes paid to another state.  You'd have to find a person familiar with MN tax laws to address how the CA-sourced income would be taxed on the MN returns.

As to the LLP/LLC question, LLPs require a general partner, which usually has unlimited liability. Unless someone is willing to take on unlimited liability, or you want to form an LLC or corporation to serve as the general partner, you may want to consider the LLC structure. Multi-member LLCs are taxed like partnerships unless electing otherwise.

If the property is located in CA, chances are likely that the LLC will be treated as "doing business" in CA and be required to register with the CA SOS and file a CA LLC return; this would be true whether the LLC is formed in CA, MN, or any other state. If your LLC is not doing business in MN, then it would seem to make sense to register it in CA to avoid the need to pay registration fees in 2 states, if you can avoid MN filing fees and requirements. Of course, I am not familiar at all with MN laws.

Hope this helps point you in the right direction.

*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.

@Caitlin Lutenske-Logan

I'm curious as to why you're interested in such an involved plan that has enormous set-up costs, as well as continuing management costs.  You're proposing a very complex structure that may be hard for lenders and insurers to understand.  Are you anticipating or expecting lawsuits?  There's certainly no right or wrong answer, and as you say, everyone has their own opinion, but generally I think you will find most people on this site having the opinion that such an involved structure may be overkill (of course, no one has a crystal ball either).

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. If your property is not in WY, now you may be involving fees and filings in 3 states if you went forward with a WY LLC.

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. 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.

@Toby Copeland

Yes, definitely a doozy. There is a lot going on and tons of competing considerations. Property taxes are one concern, and then you have possible gift tax, estate tax, and income tax considerations all swirling around at the same time. When you add that to possible LLC laws and rules, as well as trust/probate rules, there's a lot to consider at once. I see that you're also in San Diego, so feel free to reach out to me by private message if you want to chat further. You'll likely want to start with reviewing the requirements under Prop 19 for retention of the base assessed value when adding a child to title, and also look up the rules for a basis step-up at death. You may also want to review the rules for property tax reassessment while title to real property is held within a business entity like an LLC, as the rules are different than when title is held by an individual or trust.

*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.

@Michelle Sangalang

Did you try asking your CPA for his/her suggestions in this regard? He/she would probably be the first person to ask since he/she knows your personal situation better than anyone else here could. You could ask your accountant about options for bonus depreciation or possibly updating the properties in order to receive depreciation deductions or write-offs for repairs, maintenance, etc. But, there of course would be some cash outlay in order to purchase new capital assets or update the properties.  Have you looked into the 199A deduction?  Or looked into the pass-through deduction for SALT workaround in CA?

Glad to hear that you have a trust in place - please be sure that your trust and estate planning is update-to-date as well.

If you need referrals for any professionals in San Diego, send me a message.

*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.

@Melody T.

I can appreciate the additional questions, but unfortunately, you're: 1) getting into the realm of legal advice, and 2) are asking specific questions that can be dependent on the facts.  Neither of these are well-suited for a public forum.  So, generally, I guess I would say that where a lawsuit is brought or what law applies would be entirely dependent on the type of case, facts of the situation, and locations of parties involved.  There's an entire semester-long course in law school called Civil Procedure (the absolute worst - *shudders with fright at the memories*) about figuring out the answer to that question based on the facts. You would be well-advised to speak to an attorney who litigates the types of cases that you think are more likely to arise for you to determine what venue and/or law may be applicable.

I tend to favor CA LLCs for CA residents for the benefits that I mentioned, but it honestly depends on the situation.  There's no right or wrong answer, and as you'll see on these forums, everyone has a different opinion, and for different reasons.  The answer of "it depends" is annoying, but sometimes, it's just true.

As to the mortgage, you should look into something called a due-on-transfer clause for additional research as a starting point. 

*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.

@Melody T.

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. 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.

@Namal Burman

Did you try asking your CPA for his suggestions in this regard?  He would probably be the first person to ask since he knows your personal situation better than anyone else here could.  Note that rental losses are traditionally only deductible against rental income; since you clearly have positive passive income, a loss-producing property likely would help reduce that income.  But then again, do you WANT a loss property?  You could ask your accountant about options for bonus depreciation or possibly updating the properties in order to receive depreciation deductions or write-offs for repairs, maintenance, etc.  But, there of course would be some cash outlay in order to purchase new capital assets or update the properties.

If you need referrals for any professionals in San Diego, send me a message.

*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.

@Erick Magana

Congrats on getting started!  I'm based in San Diego and would be happy to provide some referrals.  Send me a message if you're interested with a little more details about what type of documents you may be looking for assistance with drafting/reviewing.

*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.

@Bryan Christopher

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 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.

Any lawsuits should 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'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 also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

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.

@Dan Becker

It sounds as though you are not the child of the seller?  If so, I'm not sure how you're envisioning qualifying for the parent-child exclusion for property taxes?  Note that under the newest Prop 19 laws, the parent-child exclusion is generally only available for a property that was the parent's primary residence that becomes a child's primary residence within 1 year of the transfer.

*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.