Cali LLC Do We Bite The Bullet/pay $800
I have a few properties, and have heard all say the best way protect is LLC. I have also heard the best idea is to put each property in a LLC. That can get expensive at $800.00 minimum per year. I know getting sued for all of your property can be even more expensive.
My question for California's senior investors (Lufo) etc., is what do people in the know do? One LLC for all properties? Title holding trust, held by LLC's. Sole Proprietorship? I do not want any of my properties held in my name...What to do?
While Im not a CPA or an ATTY. I do not have any houses with serious equity in a corp or LLC. I own them myself. I onlyu put fully leveraged props in the corps. The onlyreason to put something in a corp is to protect your personal assets, if oyu get sued, the corp I mean, they can get a home with a lot of equity. On the other hand, if the home is fully leveraged, so what, they get a fully leveraged house..
Richmonte
But if you do that, then you can personally get sued, then they still get the house with all the equity, and if that's not enough they get access to all your other houses too.
If it's in an LLC, sure they get a house with equity, but it stops there.
At least that's how I see it.
I have my properties in an LLC. One of the main reasons is I have (what I consider anyway) substantial equity and I don't want that at risk in sue-happy California. I don't mind the tax at all because the depreciation deduction completely wipes out my tax liability every single year, so I don't have to pay it. The $800 min tax is only for foreign-filed LLC's (ie Nevada) which is where we are registered because of the history of "piercing the corporate veil" is something like 80-something% in California and there have only been TWO cases of it EVER in Nevada.
If you file in California, the $800 min tax does not apply. But, I, too, am not a tax attorney or CPA.
I just recently posted similar question. And, yes, the tax applies to LLC doing business in CA or registered in CA. Minimum tax means that even if you do not have any profits, you still have to pay $800 tax. And, yes, you wrap LLC around your every rental property to avoid being personally liable for whatever reason you may get sued. As for your personal residence - do not do it. If you do, you cannot sell tax free after 2 years living there.
I am new to "landlording", so would very much glad to get advise what is the best and cheapest way to hold properties.
Let me first say, that choosing an LLC vs a Sub S-corp vs a C-Corp is something that ought to be discussed with an attorney, preferable one who is versed in real estate, tax planning, and asset protection. I say this because every investor's situation and goals are different.
For example, I have heard of some landlords using an S-corp for holding their rental properties. They hold up to a certain amount in equity in the entity and if they exceed that threshold, they form another corp.
For example (a really simple and not necessarily the most prudent example), let's say you have 4 rental properties. Each one has $50K in equity. You have decided on a threshold of $100K. You would set up an S-corp for each pair of properties. This then limits your liability in case some one injures themselves on one of your properties and wins a judgment. The judgment would only attach to the assets of the corp which owns them (i.e., two of of your four properties); rather than all if you had them in one entity, or worse, all of them PLUS your personal property if you didn't have one at all.
In cases of large equity properties, you may want to set up a Corp just for them.
Moreover, some landlords, if they manage their own property, then form a C-corp to take care of management duties for all properties and expense a lot of their things through the C-corp.
I would tend to stay away from owning anything of great value in my own name if I could help it.
If you have a lot to protect or if the tax consequences suggest you would benefit from using an entity (e.g., avoiding dealer status), then I do not think the $800 should stop you. If you, however, you do not have much in the way assets and have not done any deals, then I would wait until you do one or two before setting one up.
The bottom-line is to act when it makes sense to act.
Hope this helps!
RS[ Edited by Rogue on Date 12/30/2003 ]
Thanks for the quick replies...feel free to pile more on.
My props generally start leveraged, but that changes fast in Cali. while my ltv's are high, so to is the equity, in terms of dollars. I suppose I will keep researching.
Quote:If you have a lot to protect or if the tax consequences suggest you would benefit from using an entity (e.g., avoiding dealer status)Rogue,
An entity does not "avoid" dealer status. Dealer activity within an entity just makes the entity a dealer.
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nlsecor,
Suggest you limit the equity in your LLC to around $250K. If you have $250K equity in three properties, then just put these three properties in one LLC. Form a new LLC for the next group of properties in which you have up to $250K in equity. If one LLC gets sued, then your exposure is limited to $250K, while all other LLCs are protected.
DaveT,
Thanks...I thought I heard differently from a local tax guy, but perhaps mitigating is a better word than avoiding; or maybe I am just remembering wrong.
All the more reason to have a good tax pro on your team.
[ Edited by Rogue on Date 12/30/2003 ]
MArcher,
Very true. It goes to show you if you ask 10 lawyers the same question you will get 10 different answers. My atty told me what I posted, I never really looked at it this way.
Im wondering if there have been cases, im sure there have been, where a Landlord lost everything in a lawsuit. I mean this is why we have insurance on the properties right?
Richmonte
The first attorney I spoke to also said to own the properties personally and just cover myself with liability insurance. Turns out he didn't know anything about LLCs or S corps. I got a new tax attorney, and he said the opposite, do not own investment property without a corporate shield. Indeed, to make an informed decision one really needs to understand what is at stake.
I agree with the latter, the additional cost is minimal for the protection offered, why risk it? I also believe that tax deductions become a little easier through a corporate shield.
Didn't Robert Allen lose everything in a law suit as a result of this very thing?
Cheers[ Edited by Marcher on Date 12/30/2003 ]
Quote:
On 2003-12-30 05:11, richmonte wrote:
MArcher,
Very true. It goes to show you if you ask 10 lawyers the same question you will get 10 different answers. My atty told me what I posted, I never really looked at it this way.
Im wondering if there have been cases, im sure there have been, where a Landlord lost everything in a lawsuit. I mean this is why we have insurance on the properties right?
Also, chances are the 10 Attorneys have 10 different specialties. It's like going to a pediatrician for your heart condition. The pediatrician will know enough to be dangerous. Own nothing...control everything...
Good question and one in which many of us face....I am in a similar situation and own 3 investment properties in my own name, but was wondering how to go about changing those over to an LLC? I already have the LLC license from the state of VA, but don't I have to switch all the deeds to reflect the LLC? What is required here? Can I re-fi these in an LLC's name or will the mortgage co frown on this? In other words- how does an LLC affect re-fis, buying, selling?
Thanks again for the responses. The questions directly above are good one's and I too am interested. P.S. I have seen that many of the posts are from California. If one of you guys/girls has an attorney or a solid tax guy that can help me, please advise. I also have a liquor store I need to incorporate seperately.
[addsig]
If you have an LLC you can deed the properties into it. I am not sure of the exact procedure, but I have noted in other posts that it is fairly simple.
Re-financing under an LLC probably won't be as easy as doing it personally, some companies might not do this, but if you phone around the LLC should be able to borrow money against the properties. Seasoning requirements might apply, so you may need to hold them in the LLC a while before you can refinance.
We were told that borrowing money as an LLC would not work, but were able to get a bank loan for a property using an LLC that had existed for less than 1 month.