forming LLC for investment property

[avie]

hello-
I am just starting to gather info on the pros (mostly) and cons of forming a LLC for a planned real estate investment... should I talk to a CPA or lawyer for more info, and for actually executing it? Any referrals for suitably qualifed professionals are welcome.
Also, is a CA llc okay for an out-of -state property, such as in Arizona

Thank you.

 

[usctrojancpa]

hello-
I am just starting to gather info on the pros (mostly) and cons of forming a LLC for a planned real estate investment... should I talk to a CPA or lawyer for more info, and for actually executing it? Any referrals for suitably qualifed professionals are welcome.
Also, is a CA llc okay for an out-of -state property, such as in Arizona

Thank you.

LLCs are very simple to form, you can go to the secretary of the state website (whichever state you want to form the LLC), fill out the forms, and then submit the required fee/s.  If you feel that you need more assistance go to a site like legalzoom and they will take care of everything for a small premium.  I'll assume that you know the pros and cons of forming an LLC so I'll skip that part (but if you don't I can go over them).  The best states to form LLCs are Delware and Nevada, not California (high cost).  You can have a Nevada LLC that has title to a rental property in any state of the US.  Lenders will not lend to an LLC unless it has 2+ years of operating history and even it is does, you will be required to provide personal financial data and sign a personal guarantee.  Also, you will be financed by a commercial lender if you try to buy a rental property under an LLC which more unfavorable terms and rates.  My advice to you would be to purchase the property under you name, have an LLC set up, and then after you close on the purchase you can transfer the title into the LLC's name.  Remember that you will need to show the county of where the property is located that you are a sole member of the LLC so that you don't trigger any type of transfer tax.  Also, you will need to have the LLC as an additional party insured on the insurance policy (not all insurers will allow that and if they do, they'll tack on some charge to the premium to do so).  Lastly, you will need to file a federal Form 1065 on an annual basis for the LLC by March 15th and the K-1 data will pass through onto your Schedule E.  Let me know if you have any other questions.

 

[avie]

Thanks. That was immensely helpful.
My husband and I both plan to have our names on the LLC- I read that no self employment taxes are required as any rental income will be passive and we will source out the property management work- does this apply to a LLC with two members? Or only to a solo one? (or, am I mixing issues?).

Also, if I go with a Nevada LLC and a Arizona house, I guess there will be some tax credit/ adjustments when filing in both states (in addition to california). 

Re. the cons of LLC,I assume you are referring to lender issues, and insurance companies. Are there any others I should know about (other than fees, documentation needs).

Also, if forming a LLC is fairly easy and quick, and if we can cash-buy, should we directly purchase under the LLC's name? 

Thanks again.

 

[usctrojancpa]

Thanks. That was immensely helpful.
My husband and I both plan to have our names on the LLC- I read that no self employment taxes are required as any rental income will be passive and we will source out the property management work- does this apply to a LLC with two members? Or only to a solo one? (or, am I mixing issues?).

Also, if I go with a Nevada LLC and a Arizona house, I guess there will be some tax credit/ adjustments when filing in both states (in addition to california). 

Re. the cons of LLC,I assume you are referring to lender issues, and insurance companies. Are there any others I should know about (other than fees, documentation needs).

Also, if forming a LLC is fairly easy and quick, and if we can cash-buy, should we directly purchase under the LLC's name? 

Thanks again.

No need for thanks, that's what I'm here for as your friendly forum licensed CPA.    LLCs that hold real estate and have active or passive rental income will not trigger self employment taxes (the net income from your Schedule C based upon 1099 income is what will trigger self employment taxes).  A single member LLC (where 100% of the actively passes through to only 1 federal tax return) is generally disregarded for entity for federal tax purposes, where you'd report your rental property results on your individual return (single or married jointly).  Generally most states follow federal, though some states don't.  Nevada does follow federal so single member LLC disregarded is recongized.  I'm not sure about Arizona, but you will not have to file the state version of the form 1065 in Nevada as Nevada is a no income tax status (individuals do not file a state return).  You will get credit for any costs and/or taxes paid related to the LLC as a deduction to net income.  The major cons are the ones you've listed above.  As you cash buyer, you are not bound by lender rules and can purchase rental properties directly through the LLC (make sure you research the insurance matter with a few providers before you move forward) so you would save yourself the step over (including the recording fee/s) having to transfer the title into the name of the LLC.  Note that a multi-member LLC (where you have multiple owners and are required to send multiple K-1s) by defualt is a partnership, but an entity can have be treated as a Corporation (including S Corp).

 

[rkp]

I'll assume that you know the pros and cons of forming an LLC so I'll skip that part (but if you don't I can go over them).

Would love to learn the benefit of an LLC for an investment property.  I have heard people buying a property under similar LLC name for the benefit of prop tax in CA.  For example, I buy 123 Rainbow under an LLC called 123 Rainbow LLC and 10 years from now, its doubled in value and I want to sell it.  Instead of selling the property, I sell the LLC and the new owners retain the prop tax rate locked in 10 years before.  Is that even accurate and is that the big benefit?