2 Rental Properties In Another State
Well I need some advice- I sold my home in fl (moved to nyc) and used the money to purchase 3 rental properties in MD. I bought 2 cash and one financed and looking to transfer them into a LLC.
MD has a tax of 4.75% on out of state owners when selling. I was wondering if and when I switch them to the LLC which i intend to do in MD will i then be avoiding this out of state tax for out of staters.
secondly I am also looking at a home as a rental in Charlotte, would you recommend I also transfer it into a LLC [ Edited by equent on Date 11/16/2004 ]
I posted an extensive reply to a similar question in this forum under the title, LLC's In CA, NV, DE, please review this post also.
That said you need a top level LLC in Nevada that owns three MD LLCs with one property in each LLC and one Nevada or NC LLC for the Charlotte property depending on NCs treatment of out of state owners. In general most persons would choose to have each LLC taxed as a partnership and income from each distributed to it's owners, in effect most income would be consolidated in the Nevada LLC and either retained (less taxes paid) for further investing or distributed to you and any other owners per the provision you state in your Operating Agreement for each LLC. Avoid single-member (owner) LLCs as their treatment under law in many states is not as favorable as that of partnerships or multi-member LLCs.
Many people can benefit from having their top level LLC taxed as a corporation instead of as a partnership, particullarly if you intend to use this money to reinvest and not draw much of a salary from it. If you do draw a salary you might consider doing so for the MD or Charlotte property LLC as it can help lower state taxes with proper planing. Later you can move to a state with no personal income tax and draw a large salary if you wish, saving state tax at least.
Having the MD LLCs should avoid the 4.75% out of state tax but income taxes, and any LLC fees, will still be owed by each LLC.
You must have formal Operating Agreements with appropriate legal protections/language included to gain the full benefits of an LLC. Do not ignore this aspect of each LLC.
The benefits of doing this are several, each business (LLC) can fully deduct all expenses while you personally may not be able to, you gain significant protection from personal lawsuits (outside liability), you gain signifcant protection from liability arising from renting/owning each property (inside liability), you have better control and timing over your tax situation, expenses, and income, and you can (over time) establish a very good credit record for your top level LLC, and perhaps the others also, that may eventually be able to qualify for loans by itself, without your personal gaurantee.
LLCs are the best vehicle out there right now for the real estate business, holding property in your own name exposes you to extensive inside liability and makes you a target for frivolous lawsuits simply because you have assets that can be reached. A properly structured LLC severely limits potential creditors in collecting any judgement and many lawers, especially ones working on contingency, will not even bother to attack such an arrangement, this is especially true of Nevada LLCs.
Good luck, sounds like you are off to a good start, consider some multi family in the future.