All Forum Posts by: Naseer Khan

@Manolo D. The land trust is a great tool for anonymity but it does not provide actual liability protection like an entity because if someone finds out who the beneficial owner of the trust is, then you are no longer protected. Of course, the only way to find out who the beneficial owner of the trust is by court order, which would require legal fees and time. 

The anonymity has great benefits because if one makes it hard to find out the owner of an asset, then the person that is trying to figure it out will need to spend money and get a lawyer, which is the best deterrent for a potential plaintiff. 

Only the trustee's name is recorded with the county, so if you or your spouse are not the trustee, then the anonymity is intact. Having an LLC as the beneficiary is a good idea as well.

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.

An S Corp can be an owner of an LLC but an LLC cannot be a shareholder of an S Corp (except in the limited circumstance that I explained above and the IRS has not even made that clear). See IRC Sec. 1361:

(b) Small business corporation

     (1) In general For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not:

         (A) have more than 100 shareholders,

         (B) have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual, (emphasis added)

         (C) have a nonresident alien as a shareholder, and

         (D) have more than 1 class of stock.

The exempt organizations are generally nonprofit organizations and the exempt trusts include trusts owned by individuals. 

As such, it is likely that a land trust with an LLC as a beneficiary does not qualify as a shareholder. I will have to look into this one further.

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.

If the attorney is acting purely as a trustee, then a license is not required but if an attorney is creating the land trust document, then he/she would need to be licensed in that state because that document affects the legal rights of another person. 

@Andy D. Generally, attorneys can only practice law in the state that they are licensed and most attorneys are only licensed in one or two states. Performing legal work in a particular state, such as setting up land trusts or anything that effects a person's legal rights requires for that matter, require the attorney to be licensed in that state. So, you  may need a few attorneys if you require legal work in different states. 

@Account Closed As you pay off the properties, I would consider moving them to a different LLC just so all of your equity is not at risk. But this all depends on your portfolio and how you want to structure it. The LTV is just one factor to consider.

@Samir Pathak Welcome and get ready to learn all you need to know about real estate investing. There are a lot of great folks in the bay area that always willing to answer  questions and keep you motivated. 

@Elizabeth Cavanagh I work primarily with real estate investors of all levels of experience. Feel free to reach out for a consultation. 

@Account Closed I agree with the other poster that both the umbrella policy and the LLC is the best way to go because they offer protection is different ways.

Regarding whether you need a separate LLC for each property - that is not necessary, especially in CA where the fees are so high. If you own several properties, then you can group the properties in a few different LLCs based on factors such as: how much equity you have in each property, the type of property, the neighborhood of the property, etc. So if you one LLC that contains 3 properties with 80% LTV each, and all are located in bad neighborhoods, then you dont want to add a nice paid off SFR worth $800,000 in that LLC - you will want to put that in another LLC with perhaps another similar type of property. Each LLC is its own entity and if someone injures themselves in a property owned in one LLC, then the other LLCs and you personally should not be at risk for that lawsuit. You may get named in the lawsuit but you should be able to dismiss those claims against you early on in the proceedings.

Having a master LLC in a state that is business friendly will not help because if you get sued it will be in the state where the property is located and those state laws will apply. If you want to add an additional layer of anonymity, you can place each property in a land trust with the LLC as the beneficiary.

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.

@Gabriel Ugarte 

1) I like the strategy of opening another LLC in the other state and making the CA LLC the 100% owner of that other state's LLC. The income from the out of state LLC will not be subject to double self employment taxation because the LLCs are disregarded entities for tax purposes and the income flows to the CA LLC and then to the member(s).

2) When you add an S Corp to the mix it can get a little messy because generally only individual persons can be shareholders of an S Corp, meaning that other entities cannot be shareholders of an S Corp. However, there is an IRS Private Letter Ruling that states that if the LLC is a single member LLC and the S Corp contributes all of its shares to this LLC in exchange for 100% ownership of the LLC, then the transfer is allowed because the single member LLC is a disregarded entity. Note that Private letter rulings are for specific taxpayer situations and the IRS hasn't provided more affirmative authority on this matter.

So, it is possible for all the out of state entities to pass through to the primary CA LLC but there needs to be explicit planning and execution in order to comply with all of the rules and regulations. If you have an attorney, I would consult with him/her, or feel free to reach out for a more detailed consultation.

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 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 far reaching rules. 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 a Delaware 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 Kansas City property to the CA LLC, you will have to file as a foreign registered business in Missouri and pay the same fees as other LLCs because you are conducting business in Missouri.

Either way, you will have to pay the CA LLC franchise tax, so you are better off opening 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 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.