All Forum Posts by: Katie L.

@Wesley Brown

Buyer and seller on both ends of the 1031 need to be the same. So your brother could not sell in his own name and then purchase in an LLC that is partially owned by you and partially owned by him. He likely could take title to a smaller percentage, so brother sells farm, brother as to an 85% tenant in common interest owns multi family with Wesley as to a15% tenant in common interest or something like that. BUT you absolutely want to run this by your CPA or attorney who knows the full scope of the situation and all the facts to give you personalized advice. These forums are great for idea generating but not a substitute for personal advice. Also, be wary of sweat equity and how it affects the accounting and taxes... can be very complicated. Sometimes you can only receive a profits interest for your services such that the 5% might not be entitled to collect rent and only capital gains upon sale. You may be better off receiving a management fee and only receiving equity for actual capital that you put into the deal. Be very careful with everything you're suggesting... worth the cost of hiring a professional to cross your t's and dot your i's.

*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.

@Miguel Horta

I have a name in Newport Beach, would that work for you?

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

@Michelle Smith

I have names for you in San Diego if you're willing to work remotely.

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

@Roy Marks

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 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 need to pay registration and filing fees in at least 2 states if you don't buy CA property.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

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. 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.

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 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.

@Karl S.

Couple of things to add as food for thought: you may want to look into how hiring your spouse affects your Section 199A pass-through deduction, if you qualify.  Higher income taxpayers are subject to a W-2 or capital test that limits the 199A deduction.

You also may want to look into an S-corporation and the pros/cons to that.  Could possibly save yourself some self-employment tax with an S-corp, though it has other downsides.  Also note that S-corps in CA are subject to a 1.5% entity level tax and the $800 minimum annual tax which is different from most states.

*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.

@Hyung Lee

Couple of things to think about: if anyone is contributing services to the partnership, the accounting and taxes can get messy.  Similarly, if you are contributing different dollar amounts but sharing profits 50/50, that also gets messy and complicated.  Definitely seek out professionals for assistance.  The loan being in just your name is a little odd, and puts you at additional risk if things went awry or your partner left you hanging.  It is likely advisable to have a written agreement that addresses all sorts of possible issues that could arise in this situation including with regard to the loan and any mortgage interest deductions, splitting of expenses, splitting of profits, tax reporting, what is to happen in the event of disagreement, any rules about rehabbing such as particular types of materials to be used or types of projects (can he choose the cheapest and ugliest materials, consider that has having rehabbed it, and then takes a split of the profits still at 50%?), etc., etc.

Do you care about limited liability... From buyers, from your partner, from contractors, from labor doing the rehab?  If you did create an entity, would you still be able to receive a loan?  Do you care about paying $800 min tax for a limited liability entity in CA?  

If property is only in your name, you may have some issues from a tax standpoint as well.  To an outside party, it certainly looks like a taxable gift from you to him if you give him some of the profits from a sale of a property wherein you alone were on title. Is there any reason you can't both be on title and on the loan?

I think what you've proposed has a ton of possible issues.  It's do-able, but you'll definitely want to sit down with a professional, and be prepared to pay a decent amount for good advice too.  Not sure what your prior firm told you, but you have a lot of options, just know they will all have complications and downsides too.  It's a matter of weighing alternatives and priorities, and picking the path that is best for your individual situation.  The forums are great for idea-generating and bouncing thoughts, but never a substitute for personalized advice from a professional who knows all the facts of your situation.

*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.

@Troy Danno

I have names for several CPAs in San Diego if you're willing to go a little further south.  I second Akore as a great resource.

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

@Monica Crisostomo

Is your goal to not have your name attached to the public records? Note that LLCs in California will require the name of a manager or member on the filings that are posted on the Secretary of State website. Since you're managing the LLCs from CA, will likely be "doing business" in CA, requiring a filing in CA, and $800 minimum for each LLC. Seems like a bit much and huge legal fees to set up, plus complicated taxes, but we don't have all the information and know anything about your particular situation or your net worth. Definitely sit down with your own attorney to get personalized 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.

@Matthew Johnson

Definitely recommend a CA based CPA, or at least one familiar with CA taxes.  As a CA resident, you'll have to report all your earnings in CA, which is usually one of the most complicated states, including your FL rental income.  Versus earnings in the other state will only require a nonresident return and report just the earnings in that state but not all your income and deductions.  Plus, FL has no income tax.  :)  I second Akore Berliner as a great CPA, if you need more references in San Diego let me know.

*This post does not create an attorney-client or CPA-client relationship.  Readers are advised to seek professional advice.  The information contained in this post is not to be relied upon.

@Jesse Pierce

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.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

Creating an LLC in California would 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.

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.

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.