All Forum Posts by: Katie L.

@Israel R.

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. 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. Once the umbrella policy is exhausted or limits are reached, if the lawsuit requires you to pay more, the winner should be able to tap into your personal assets if they are not in an entity.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a 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. But some people are looking at creating two different entities and structuring it in such a way so as to be able to take advantage of the tax arbitrage in rates.

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.

With regard to the trust issue, I'm unsure whether it's in a grantor trust or an irrevocable trust (like a family trust vs a gift trust). It's likely you'll want to hold title to any LLC interest and direct real property interests in your trust to help avoid probate, particularly so since it looks like you are a California resident, which has a somewhat low threshold before subjecting people to probate. That being said, if you do not have your estate plan in place, you will want to make sure you get something in place to account for all of the unknown but foreseeable situations. I have references in San Diego if you're interested but can't say I know anyone up north to refer you to.

*This post does not create an attorney-client relationship or CPA-client relationship. Readers are advised to seek professional advice.

@Mario Palacios

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. You'll also want to ensure you have a good property manager to look after the upkeep of the property since you are not there to notice anything deteriorating or which may need attention.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a 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. But some people are looking at creating two different entities and structuring it in such a way so as to be able to take advantage of the tax arbitrage in rates.

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 relationship or CPA-client relationship. Readers are advised to seek professional advice.

@Stephen Warnock Welcome!  Let me know if you need attorney or CPA references in San Diego.  Good luck!

@Michele G.

If your current MI CPA is familiar with CA laws then stick with him/her. If they are unfamiliar then maybe best to engage a CA-based CPA. 1031 exchanges is federal law so most CPAs should be familiar with it, it’s just the California source income that you need to worry about. Probably a nonresident return. Without knowing your full picture or your CPA’s qualifications I can’t say what you need to file or who you need to talk to but my guess would be you could stick with your MI CPA. Ask them after tomorrow (tax deadline) if he’s comfortable or familiar with your situation.

@Michele G. I can refer you to tax attorneys in San Diego if you need.

@Mark Hill

Not giving advice here as I think you still need to consult an attorney about your situation, but here's my take:

If you are only a silent partner, why not create an LLC in a different state and try to avoid $800 minimum tax? I guess it depends what you are doing for the company here in CA if it rises to the point of "doing business" in CA. If you are not managing it, servicing it, making decisions, etc. you might be okay. If you will be making management decisions, then, yes, you'll be stuck with the $800. The min tax certainly is annoying but well worth it to have your legal liabilities covered and your interests protected if you need a separate LLC.

If you are both wiring money to the escrow company at a 50% interest, how will title be held? I thought you said title was being taken in the partner's name? You said "they will be purchasing the property and obtaining the loan" so there IS a loan at the individual level on behalf of your partner, but no note or loan between both of you? Is that what you mean by there's "no note or loan"? Sounds to me like on paper it will look like you gifted him 20% of the purchase price, he purchased the home in his own name, created an LLC and put the property into it, then gifted you an interest in the LLC. I know it's hard to get financing in the LLC itself, but if I were you, I would want some documentation so that he is liable to you to contribute the property to an LLC. Could be in the form of a note. What is to stop him from receiving your downpayment, taking title in his name, and never talking to you again? He holds title free and clear and you have no documentation to back yourself up other than maybe some correspondence which may or may not be binding on him. Again, I think you should get an attorney involved and have this done correctly. You certainly don't want to blow the corporate veil as that defeats the purpose of having an LLC in the first place, nor want the IRS to look at it as a series of gifts which unnecessarily eats into your lifetime exclusion and annual exclusion. Maybe I'm being too conservative but I personally wouldn't be so quick to wire so much money without documentation to protect myself. I'm sure your partner is trustworthy and a good person, but in this litigious time, better to be safe than sorry. And if I were the partner, I would want to make sure you sign something that says you are also liable for the note or agree to have the LLC assume the note. If it's taken out in his name... the bank is coming after him short of having a personal guaranty from you...

Your existing LLC agreement can be amended so that the profits and losses from certain properties can be allocated to different partners per the agreement, but as I said, the properties will be held and owned by the COMPANY. And you each hold an ownership interest in the COMPANY, not in the underlying real estate. You can amend the ownership percentages so that you have a higher ownership interest in the company but once you own a share of the company, you each own that percentage of the company's assets... which now include your solo property. The deed says Mark's LLC, doesn't specify a percentage ownership between Mark and Mark's partner. You can maybe make a very customized document that requires your partner to obtain your consent or have unanimous consent before making decisions regarding your solo property, but he undoubtedly would have an ownership stake in it... not directly... but through his ownership share in the company. Maybe you can check with whoever gave you that advice and knowledge in the first place saying you could do that and have them explain it to you, but I think the most conservative way would be create a new LLC. As I said, good legal advice is most certainly worth the payment, as is the $800 likely. Not giving advice here, just my opinion and two cents. Follow up with counsel.

If you need references for attorneys in San Diego, I can help you out, but my resources don't really extend to Nor Cal.

*None of this post is intended to be legal advice.  It does not create an attorney-client or CPA-client relationship.  Readers are directed to seek professional advice.

@Daniel Ordonez

File an extension ASAP.  You still will need to pay in the tax due by 4/17 but will get an automatic 6 month extension to file the return... if you request it.  Did you spend money on the rentals?  If so, may not be so simple.  Some cash outflows may need to be expenses and some capitalized.  If you have losses there are complex calculations sometimes to see if you qualify to take passive losses.  Nothing is ever that simple with taxes.  Try H&R Block if you want to get them done in the next week, otherwise start reaching out to CA CPAs after 4/17.  California has a lot of special rules that you probably want to look into a CPA who is based in California or at least very familiar with CA tax laws.

After 4/17 you can try reaching out to @Logan Allec who is very knowledgeable about real estate and a regular contributor on Bigger Pockets.

*This post does not create an attorney-client or CPA-client relationship.  Readers are directed to seek professional advice.

@Mark Hill

If you are going to have separate ownership, you likely don't want to commingle with your current LLC. Once you transfer property into the LLC you both take an ownership interest in the LLC, and the assets become the Company's assets. So if you have a 50% ownership in the LLC, you each will have 50% ownership of all of the assets of the Company which can include both your solely purchased property, and your jointly purchased property. There are ways you could customize your operating agreement with special allocations and such so that you maybe get the income from the property you purchased, but ownership would be in the Company's name and you each would have an ownership interest in the COMPANY, not the real property. That means depending on how your operating agreement is drafted, he could maybe have authority over selling the property YOU purchased. So... would want to do a different LLC. Otherwise, you're giving them partial ownership and authority over the real estate YOU purchased alone. Perhaps you can do it so that you have a higher voting share of the LLC and if everything is done by majority vote and you have the majority maybe it's not a big deal, but much cleaner to just create a new LLC. It's worth the legal fees to have it done correctly. You may get along with your partners now, but never know what may happen down the line. Let me know if you need attorney references, though my resources are mostly limited to San Diego.

When you say "they" will be purchasing the home... you mean your partners, right? Not the company? So basically... you're loaning money to them and then they will owe you a note? I don't see how you are joint owners of the company then if all the financing and property title is in their name. Am I missing something? Or are you contributing cash to the LLC and then the LLC is taking out the loan? You both need to contribute something to the LLC to have a joint ownership unless you're going to be gifting something. Sounds more like you're loaning money to him, he is purchasing the property, then he is contributing to the LLC, in which case he would personally owe you a note but would have 100% ownership of the property. Services can count as a contribution to a partnership but is much cleaner if you contribute property.

I think you definitely need to talk to an attorney about this.  Seems like there are a lot of structural issues and you want to make sure you and your interests are protected.

*None of this post is intended to be legal or professional advice nor to create an attorney-client or CPA-client relationship.  Readers should consult professional advice.

@Kamyar Farhang I don't know the answer myself so I won't give advice but wanted to comment that I work with an attorney in San Diego who specializes in retirement plans if you wanted to become a client of his.  He's in San Diego though, and probably wouldn't give out advice for free.  But, if you run into an issue, just throwing that out there as a resource.

@Alex Stepanov

If you're willing to be flexible on the location, I recommend @Logan Allec who is an excellent CPA and regular contributor on BP.  He really knows his stuff when it comes to real estate so he may be a good resource for you.