Archive for the ‘Wyoming’ Tag

Rental Property Outside CA: LLC Options and Issues – Part I

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.

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Retroactive Tax Increase on Highest Taxed State

Originally published in the Cedar Street Times

November 30, 2012

Depending on how you look at it, Californians could now consider themselves the highest taxed state in the U.S. after our recent passage of Proposition 30 on our November ballots.  Proposition 30 increased income tax rates by one to two percent on people earning over $250,000.  It also made these increase retroactive as of 1/1/2012.  If you are subject to these higher tax rates, be aware that your state withholdings are likely inadequate and you should talk to your tax professional about making an additional payment by April.  No penalties will be assessed for under withholding to the extent that it is attributable to the tax hike, and you pay it by April 15, 2013.

Our top rate on our highest earners is now 13.3%, commanding an impressive 2.3% margin over second place Hawaii (11%), and 3.4% over third place Oregon (8.9%).  Other states in the high eights include Iowa, New Jersey, Washington D.C., Vermont, and New York.

You do have to keep in mind that some places have city taxes also.  But even a penthouse occupant in New York City that has a state tax of 8.82% and a city tax of 3.876% (combined 12.696%) would not have to muster up the cash of a wealthy dessert dweller in California.

Of course, there are many ways that states bring in revenue, such as sales tax, property tax, inheritance tax, auto taxes, etc.  So you cannot really base overall tax burden on income taxes alone. If you are looking for overall low tax burden states you may wish to consider Wyoming, Alaska, Florida, the Dakotas, Montana, Texas, Tennessee, Mississippi, South Carolina, Louisiana, or Alabama.  Different states also have distinct advantages for people earning different types of income or have different types of deductions.  The more you have at stake, the more tax planning may become a factor in where you choose to reside.

If you want to know more specifically how California’s new increases may affect you, here are the details:  California taxable income over $250,000 for single filers, $500,000 for married filers, and $340,000 for Head of Household filers will be taxed at 10.3%. Taxable income over $300,000 single, $600,000 married, and $408,000 HOH will be taxed at 11.3%.  Taxable income over $500,000 single, $1,000,000 married, and $680,000 HOH will be taxed at 12.3%.  And anyone with over $1,000,000 taxable income will also be assessed an additional 1% mental health tax.

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.