All Forum Posts by: Naseer Khan

@Asia Zdziarska 

That example that I provided above is directly from the California Franchise Tax Board regulations on LLCs, so if your situation sounds similar to that example, then that is how the FTB will treat it. It appears that your situation is similar because you are the owner of the Arizona LLC (which owns the property), you are ultimately responsible for the property, and you have some degree of control over the management company. If you received guidance that states otherwise, then there may be other factors that are taken into consideration. This assessment is based on the FTB's broad interpretation of what is considered "doing business in California."

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.

@Asia Zdziarska @Andrew Wong

As a California resident, you will still be subject to the annual $800 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. The Nevada LLC 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. The LLC must file Form 568 and pay the franchise tax. (FTB 3556 LLC MEO (REV 01-2015).)

Accordingly, you can open an Arizona 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 Arizona property to the CA LLC, you will have to file as a foreign registered business in Arizona and pay the Arizona LLC fees because you are conducting business in Arizona.

Either way, you will have to pay the CA LLC franchise tax, so one way to approach this is to open a CA LLC as your primary entity and then open LLCs in other states that you invest. The CA LLC can be a member of the other state's LLCs, so all income can flow to your CA LLC.

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. Essentially, this is a decision based on risk averseness and cash flow. Let me know if you need additional help.

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.

@Lauryn Meadows The income you receive from a flipping business is considered active income, which means that income is subject to self-employment tax. Although an LLC has the advantage of being much more flexible in terms of structure, it does not allow for much tax planning. Whereas the S Corp does allow you to split your business income into a salary and a distribution, which reduces your overall tax bill (the distribution portion is not subject to SE tax, only the salary portion is). When you start purchasing buy-and-hold properties, then it is a good idea to put those in a separate LLC.

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.

@Dino H. I am unsure of specific rental laws in San Carlos but if there are no rent control/eviction restrictions, then start by sending a 60 day notice of termination of tenancy. Be sure to include the specific language that is required in an eviction notice and be sure to properly serve the tenant. Be sure to communicate with the tenant and try to come to some sort of an agreement. If the tenant does not move out after 60 days, then you will have to file an unlawful detainer case. 

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.

@Michael Glaser it all depends on what you consider your home state - if you consider California to be your home state for tax purposes, then California's FTB (not the IRS) may impose the LLC franchise fee on you if you have out of state LLCs for your properties. You will have to register your entity in the state that the property is located, whether you set up a full fledged entity or register as a foreign business.

Whether you have to register in CA as well depends on if you consider California your home state. 

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.

@Samir Pathak You are correct - The land trust adds the additional layer of anonymity protection, which makes it much more difficult for a plaintiff to figure out who the actual owner of a property is. And making the LLC the beneficiary of the land trust provides you with that personal liability protection as well.

@Samir Pathak transferring title to the LLC is simple - you can use a quitclaim deed and many counties in California do not have transfer fees if you are the owner of the LLC.

If the property is in an LLC and you are personally liable for the mortgage, you will still retain other liability protection from lawsuits relating to the property. An attorney can argue that you are commingling personal and business but so long as you maintain your LLC as a business and follow the formalities, you should be able to counter that argument.

This response is not legal advice. You should seek counsel prior to undertaking any action. 

@Account Closed Generally, the IRS allows a person to take the MID if that person has some sort of ownership interest in the property (being on title or having a future interest) and that person actually makes the interest payment on the loan. 

However, this is not a typical situation since the property is not a primary home, second home, or investment property, so it may not be deemed a "qualified home" that is eligible for MID. See IRS Publication 936:

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home...

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

The trouble here is how do you classify a home for your elderly parents since it is not a main home, a second home or an investment home...or is it an investment home? If your intention is to treat the property as an investment after allowing your parents to stay there, then you can make a very convincing argument to the IRS of your investment intention (if you were to get audited by the IRS). But this appears to be a new loan product and I am unsure if the IRS has ruled one way or another on this issue (i.e. it would require some thorough research). 

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.

Thank you @Chris Mason My law practice focuses primarily on real estate investing and working with investors. I also have a background in tax law. Feel free to reach out and I'm sure I can help you with your questions. 

For all of the California wholesalers - as others have mentioned, CA is cracking down and have have even codified certain real estate related restrictions in the Business and Professions Code.

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 propertysales 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.