All LLC formations and consultations can be conducted in-person, via video conference or teleconference
Lucas Real Estate – with attorney Devin R. Lucas and CPA Courtney R. Lucas – offer unique expertise in LLC formation and maintenance for real estate holdings.
Contact our office or book an appointment now if ready to proceed with a detailed discussion about your LLC goals including privacy and tax considerations of a California LLC.
Forming an LLC (a Limited Liability Company) to hold real estate has long been a common approach for estate planning, tax, liability protection and privacy concerns. Liability protection and privacy are the two most common goals we address. While this practice is perfectly legal in California and elsewhere, there are some important considerations and tax implications to review and understand prior to forming your LLC. You should meet with an attorney and/or tax professional to discuss.
High-end properties, especially those purchased in all-cash transactions, such as many homes in Newport Beach, Laguna Beach and Coastal Orange County, are frequently purchased and held in LLCs.
An LLC alone will not accomplish any of your goals if not formed and maintained properly.
For example, the “privacy” aspect only works if your name does not appear on the LLC public records; thus involvement of a third-party (family, attorney, etc.) is often required to ensure complete privacy.
Likewise, liability protections will fail if you do not use and maintain the LLC correctly (i.e. leases, payments, etc., all coming and going from the LLC). If you have a loan on the property, transfer of the property into an LLC may violate your “due on sale” clause.
Regardless if your portfolio consist of large commercial properties, or a single rental condo, an LLC may be right for you.
Let’s look at some of the advantages:
– Privacy. An LLC adds an extra layer of privacy for any buyers that might not want their name to appear in countless public databases, where anyone can find out where they live.
Celebrities and high net worth individuals may have legitimate security and other concerns accompanying the desire for privacy.
However, there still must be initial and annual filings with the Secretary of State that do require listing the LLC’s Management. Some buyers may trust their attorney or other individual(s) to act in this capacity, thereby keeping their names completely off the LLC filings; however, some may want to ensure they are listed on those initial documents to reduce the risk of any fraud or embezzlement.
If properly drafted using a trusted third-party, the actual owner will never appear in the public records.
– Liability. Landlords and investors, this is for you. All landlords should know the inherent risks of rental property ownership: from simple repairs, to a catastrophic “slip and fall” on the property, there is grave risk, potentially exceeding the value of the property. Ideally, every landlord already has ample insurance for any such losses (at least $1 million, or much more). But that may not be enough. If someone is seriously injured on the property and obtains a $5 million award; your average $1 million insurance policy will be exhausted, leaving your entire assets as open targets for collection for the additional $4mm in liability in that example. So, if you have another home in your portfolio (even a primary residence), that additional home/asset may be on the chopping block and subject to collection efforts.
However, in that same example ($4mm in personal liability remaining), if the property was in a properly formed and maintained LLC, then the liability will be limited to the LLC’s insurance and assets, i.e. the property. If the property is worth $1 million, the creditor will likely get the property, but it will end there, with no liability for the remaining $3 million award against you personally (and/or your other assets).
We call this the “bomb containment unit”, i.e. if a liability catastrophe explodes within your LLC property, the damage will be limited to the LLC property, and not expose your other assets.
For this reason, it’s not enough to have one corporation or one LLC hold all your property – each property should be its own LLC to ensure each property’s maximum liability is that property and its insurance coverage, not your other assets. As that gets more complex (i.e. apartment buildings or large portfolios), often a Corporation is formed to then own and manage the LLCs.
Similar protections exist if, for example, multiple individuals own the property and one co-owner has a judgment against them; a well drafted LLC Operating Agreement may protect the entire LLC from a judgment creditor against just one co-owner, limiting the judgment creditor to that co-owner’s distributions, if any.
– Taxes. Generally speaking, there is a minimum tax from the State of California (currently $800). But that is often a small consideration for the benefits of an LLC, including pass-through taxation similar to a sole-proprietorship or partnership. This means that owners of the LLC report their share of the income or losses on their individual tax returns. Because of the pass-through tax treatment offered to the LLC, the LLC gets the best of both worlds: the benefit of protection from personal liability; and the tax benefit of being treated like a partnership or sole proprietorship.
For a personal residence in a single member LLC (SMLLC), you can still claim the (current) IRS Section 121 capital gain exclusion of $250,000 ($500,000 if you are married) when you sell your primary residence. California recognizes married couples as one owner that can elect to be treated as an SMLLC.
– Property Tax Reassessments. Real property (real estate) held in an LLC is subject to different property tax reassessment rules than real property owned by individuals. Head over to our Prop 19 page(s) for detailed information on all things property tax reassessment on individual properties (click here for Prop 19 page). You can transfer property you own into an LLC with no reassessment as long as the ownership remains the same. I.e. you own it, and put it into an LLC that you own = no reassessment, or, for example, you and wife own the property and place into an LLC owned by you and your wife = no reassessment. If you start actually transferring ownership however, caution, as that can trigger a full reassessment of the entire property.
– Estate Planning. Properties held in LLCs can easily become part of an estate plan (the owner of the LLC should be your trust). Most owners will opt for an LLC because of the tax and liability benefits; but it can also simplify an estate plan and obtain the best of both worlds. It can also make it easier to “gift” partial ownership in the LLC (i.e. the property) as you age, within the IRS gift limitations, to reduce the size of your estate at death.
Let’s look at some of the downsides:
– If there is a mortgage on your property, you likely cannot transfer the property into an LLC without risking the “due on sale clause” of your mortgage. Most lenders want the property held by an individual or a trust, not an LLC (for the precise opposite reasons you may want an LLC). If you have a mortgage, read it and check with your lender before executing any transfer. Thus, an LLC may only be available to cash buyers or those who have paid off their mortgage. Other forms of liability protection (such as dramatic over-insurance) should be looked into.
– Any Co-Ownership of any property, LLC or not, must have a well-drafted Ownership Agreement (or LLC Operating Agreement) to clearly set out each parties’ ownership and responsibilities. Thus, there is certainly some costs to form and maintain a proper LLC. However, as noted above, those costs are typically minimal and well worth the benefits.
COSTS AND TIMELINE TO FORM AN LLC:
Contact our office to discuss your LLC needs, or book an appointment now if ready to proceed.
All LLC formations are handled with an initial consultation ($295) to fully discuss the requirements, tax, liability, privacy, etc. and ultimately determine if an LLC is right for you. (We have met with many clients that ultimately decide not to utilize an LLC). From there, one-party LLCs can be easy, including filing of the Articles of Organization, drafting a basic Operating Agreement, and filing of the initial Statement of Information, along with advice and guidance throughout the formation, generally for $700, plus state expenses, see below. More complicated LLCs (such as multiple owners, potential joint venture agreements included, etc.) and/or actual deed filings (transferring properties into or out of an LLC) can also be done on a flat-fee basis, unique to the tasks. Mr. Lucas will provide proposed fees following the initial meeting and clarification of everything involved.
Additionally, the State of California has its own fees (i.e. a $70 initial filing (one time), $20 for the “Statement of Information” (filed bi-annually) and $800 minimum annual tax to the California Franchise Tax Board (more info on fees and taxes here via CAFTB)
If you are transferring a property into an LLC, additional County filing fees likely apply (unique to each county; check with your county recorder’s office or contact our office).
there, one-party LLCs can be as little as $400 including filing of the Articles of Organization, drafting a basic Operating Agreement, and filing of the initial Statement of Information, along with advice and guidance throughout the formation. More complicated LLCs (such as multiple owners, potential joint venture agreements included, etc.) and/or actual deed filings (transferring properties into or out of an LLC) can also be done on a flat-fee basis, unique to the tasks. Mr. Lucas will provide proposed fees following the initial meeting and clarification of everything involved.
Timeline: An LLC generally takes 7-14+ days to form with the California Secretary of State once the documents are completed, signed and filed. This is the regular processing timeframe and is subject to delays if the Secretary of State’s office is busy.
From the initial consultation, our office generally requests 48-hours to draft the documents (though earlier requests can be accommodated) for your review. Once approved, we file for your LLC; then the State’s timeline takes over.
Thus, a regular LLC filing generally takes 9-16+ days from the date of the initial consultation.
For an additional “rush fee” (to the state, not our office), of $350 – $750, you can have an LLC formed within 24-hours ($350) or instantly ($750). This process however requires someone physically going to Sacramento to file. Our office uses experienced attorney service providers to achieve this goal, generally around $100 additional fee to that third-party. Any rush fees are passed-through to the client with no up-charge.
Contact our office to discuss your LLC needs, or book an appointment now if ready to proceed.