All Forum Posts by: Naseer Khan

@Victoria Townsend 

I work with a lot of out of state investors who are dealing with the same issue as you. Here is a response that I posted in the past about this subject with some relevant information on your situation: 

As a California resident, you will still be subject to the California LLC franchise tax, even if your rental property is located outside California due to CA's broad interpretation of "doing business in California."

For example, Nick is a California resident and a member of a Nevada LLC that owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Nick has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Nick is considered to be conducting business in California on behalf of the LLC. Accordingly, The LLC must file Form 568 and pay the franchise tax. (FTB 3556 LLC MEO (REV 01-2015).)

Accordingly, you can open a Ohio LLC but you will still have to register as a foreign business LLC in California because you are considered to be conducting business in California, merely by you having some management control of the property and being a CA resident. On the same token, if you setup a California LLC and you decide to transfer your Ohio property to the CA LLC, you will have to file as a foreign registered business in Ohio and pay the same fees as other Ohio LLCs because you are conducting business in Ohio.

Either way, you will have to pay the CA LLC franchise tax, along with the Ohio LLC tax/fee. You cannot simply obtain a business license in Ohio and run your California LLC in Ohio.

This can get expensive (primarily from CA's fees) so you will have to assess your cash flow situation to determine if it's worth it. However, I generally recommend using business entities for liability protection, especially if you plan to buy more properties. Overall, this is a decision based on risk averseness and cash flow. 

Setting up the LLC is not too difficult and you may be able to figure it on your own and then have an attorney draft the Operating agreement. However, the forms can be a bit daunting and burdensome for many people, and they just feel more comfortable having an attorney take care of it. Let me know if you need additional help.

I am only licensed in California, so my interpretation of other states' laws are generalizations and may not apply to that particular state. You will have to consult a local attorney. 

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Account Closed

Whenever an entity that owns real property has a change in ownership, the new owner is required to fill out form BOE-100 (https://www.boe.ca.gov/proptaxes/pdf/boe100b.pdf) within 90 days or you may be hit with a monetary penalty.  This form essentially informs the Board of Equalization that there is a change of ownership and taxes need to be reassessed. 

@Thomas Kwan

As others have stated, there are too many unknown factors to determine what legal rights your friend may have at this point. Hopefully, he had some sort of written agreement (joint venture, LLC operating agreement) to help guide him. Feel free to reach out if you need additional guidance.

@Samantha Soto

California has taken steps to address this issue and have have even codified certain real estate related restrictions in the Business and Professions Code.

Your father may have an easier time deciphering this code but take a look at this link of the California Business and Professions Code: 

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=bpc&group=10001-11000&file=10130-10149

Pay particular attention to the following:

Section 10130. It is unlawful for any person to engage in the business of, act in the capacity of, advertise as, or assume to act as a real estate broker or a real estate salesperson within this state without first obtaining a real estate license from the department...

Section 10131. A real estate broker within the meaning of this part is a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of the following acts for another or others:

(a) Sells or offers to sell, buys or offers to buy, solicits prospective sellers or puchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.

(e) Sells or offers to sell, buys or offers to buy, or exchanges or offers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or on a business opportunity, and performs services for the holders thereof.

Based on the above rules, only a broker or salesperson can solicit buyers and sellers, market property, negotiate real estate contracts, and sell real estate contracts for another person. So, if you actually buy the property first and then sell to another, then you are not violating this part of the law.

However, the Code further states:

10131.1. (a) A real estate broker within the meaning of this part is also a person who engages as a principal in the business of making loans or buying from, selling to, or exchanging with the public, real property sales contracts or promissory notes secured directly or collaterally by liens on real property,...

(b) As used in this section:

(1) "In the business" means any of the following:

(A) The acquisition for resale to the public, and not as an investment, of eight or more real property sales contracts or promissory notes secured directly or collaterally by liens on real property during a calendar year.

(B) The sale to or exchange with the public of eight or more real property sales contracts or promissory notes secured directly or collaterally by liens on real property during a calendar year. However, no transaction negotiated through a real estate licensee shall be considered in determining whether a person is a real estate broker within the meaning of this section.

Accordingly, it appears that even if you act as a principal (meaning you are acting on your own behalf and not for another person), then you are limited to 8 transactions per year, otherwise you are acting as a broker.

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

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**DO NOT contact owner about listing the property or offering to help sell it.
Note: Information is believed to be accurate but not guaranteed.

@Dennis Cobos 

The LLC protects your personal assets (your house, your retirement accounts, bank accounts, stock portfolio, etc) from your business liabilities (i.e. someone gets hurt at your rental property and sues you). So, if someone sues your LLC because they got hurt at your rental, then your personal assets should be safe from that lawsuit, so long as you follow standard LLC guidelines. Accordingly, if you have significant personal assets, then you may want the LLC. If not, then you can hold off until either 1) you acquire more personal assets, or 2) your business assets grow. There really isn't a arbitrary dollar amount where it becomes prudent to get the LLC - it is more of a personal risk assessment.

A partnership agreement is best drafted by a lawyer who is familiar with contract clauses and real estate related issues. If you forgo the partnership agreement and you get into disagreement, then the Uniform Partnership Act will likely govern your dispute and you will not have any control over that. 

@Ben Andrews @Nitin Dhiman If you have not found anyone for your legal needs, feel free to contact me. Although I am in the Bay Area, I lived in San Diego for 9 years and I go there often for business. I have worked with several wholesalers and rehabbers for contract drafting and reviewing, so I am familiar with the those issues. 

@Andrew Grieb Not sure how it works in NY but in California, you can check the Secretary of State website to look up the status of business entities. Another thing to possibly look out for is property reassessment -- in California, if a business entity that is holding real estate is sold/transferred, then the buyer must file a reassessment form with the local county. 

@SIOBHAN Shiver I'm a real estate attorney who works with a lot of investors. I am also investor myself  so feel free to contact me with any of your inquiries. 

@Dennis Cobos 

The previous poster offered some good advice - you are now entering into a business relationship that will likely last for a long time so make sure this is the person you want to do business with. Nevertheless, investing in real estate can be an exciting undertaking, and I wish you the best of luck. 

Regarding your questions:

1) A real estate lawyer will be best to talk to in this situation since you are dealing with title, property vesting and contracts. 

2) I can offer you some guidance in this area - feel free to reach out 

3) I am fan of having an LLC for real estate investing; however, if you only have one smaller property with a loan on it and you dont have significant personal assets to protect, then it may not be necessary. There are many factors to consider but an LLC does separate your personal assets from your business, creating a layer of protection. If you decide to forego the LLC, you can hold the property as tenants in common, where each of you own an interest in the property based on your contribution - you will need a separate agreement for this.

4) If you form a partnership, it is a very good idea to have a partnership agreement before you buy anything and make sure you keep accurate records of your business activities for your taxes, and your capital accounts. 

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.