Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

June 28, 2013

A lot of Californians find themselves with rental property outside the state at some point in their lives.  Sometimes it is from a past life in another state, or from an inheritance when a parent passes away.  Military folks often jog around the country collecting houses like refrigerator magnets from each state in which they have lived.  There are also a lot of people that invest in rental properties in Nevada, New Mexico, Arizona, and Texas because you actually have a shot at a positive cash flow situation right out of the gates, unlike California.  And then there is the Hawaiian contingency that buy investment properties that always need at least two to four weeks of maintenance work done by the owners each year – not sure if I want one of those with all that work – it’s funny, I never hear of clients having to go to Phoenix for a month in the summer to work on those properties.

Anyway, the question always arises about whether or not to form an entity such as a corporation or Limited Liability Company (LLC) to hold the real property.  An LLC is generally the preferred vehicle to hold real property for many good reasons, including liability protection for your personal assets in the event you are sued, and the elimination of double taxation that can plague corporations.  They also have less formalities to follow compared to a corporation and avoid some nasty pitfalls of corporate tax rates and structure that could cause a lot of pain upon sale of the property.

As a result, a lot of people these days do hold property in LLCs.  Of course this comes at a price.  If you create an LLC in California (or a corporation for that matter) to hold your property, and are therefore granted the privilege of doing business in California, you are also granted the privilege of paying California a minimum $800 franchise tax each year.  You also have to pay someone like me to file another tax return every year, and you have to keep better books.  Don’t forget you have to hire an attorney to set it up initially for another $1,500 to $3,000.

I would not recommend an online filing company or do-it-yourself approach, as you are not getting any legal advice and have no one keeping you on track with formalities which could completely blow the liability protections and the whole reason you went to all the effort in the first place.  Correcting or trying to close ill-formed or mishandled entities can be a real pain as well.

So what if you form your LLC in another state such as Texas or Wyoming to hold your property?  Many states have much lower or no annual LLC fee and they have simpler annual filing requirements.  (You generally do not have to form the LLC in the state where the property is located.)  Could you save some dollars by setting up your LLC in another state?  In two weeks we will discuss California’s current position on non-California LLCs and some new rules that are just coming into play.  If you have a non-California LLC, you do not want to miss the next installment.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.