Best Structure For U.S. Real Estate Investors In Various States

What are the benefits of having an LLC as your main structure in Real Estate in various states?

The first benefit that you get is the limited liability protection so whenever you are at risk in the company is the amount of your investment and if anything happens no one will come after you and your personal assets, that is the limited liability protection. But for that the LLC needs at least 2 individuals that the first premise, you need to take into consideration when forming an LLC.

Usually whenever you buy property in one state you are supposed to have the LLC in that state because the state only allows companies that are registered in the state to do business. So, if your strategy is to buy real estate in various states ideally you should have one LLC for each state your buy the property and then all these LLCs will pass through to a single entity that could be another LLC or an S corporation, we recommend the S corporation and that is receiving the income from all the different LLCs in all the states.

So we have a structure composed of several LLCs that go state by state and they own property in that state and then all this LLCs are flowing the profit to the S Corporations and this one is the one that flows to you personally and then you pay taxes that the ideal structure for an LLC and the benefit is the limited liability protection why we suggest this because it is not a good idea to concentrate all the assets into one single company. Let’s say you have one company in one state, and you buy in other state then you are concentrating into one single entity that is a concentration of risk that if you do not have enough umbrella insurance protection it could at one point mean that you are not covering for all the risk that you have in this bulk of properties.

What is the best to have an LLC if you’re a Real Estate investor in various states in the US?

The best state to have an LLC is the state where you buy the property in. If you buy in Colorado, you have an LLC in Colorado. But the best state is always that doesn’t charge income tax in addition of the federal income tax. Now we also have to remember that real estate whenever we have an LLC or an S corporation the LLC will not pay taxes at the state level because it’s an LLC and it means if there are 2 individuals the LLC will not be taxable at the company level because it will flow the profits to the individuals but because of the structure of the LLC the company will only pay taxes at the federal level so there is no state income tax, but remember for that to work the LLC needs to have 2 individuals. If you have an LLC with 1 single member it will be considered a disregarded entity and the courts will not recognize it as a separate entity therefore it’s like it doesn’t exist and then there is no protection for any third parties’ liability because you are not an LLC and also the IRS will not recognize it as a separate entity therefore you are taxable at the state level and the federal level.

I know that many times people say that Delaware and Wyoming are the best place to open an LLC because of taxes but it all depends on the strategy that you have. We always advise that the LLC should be opened at the state where you are planning to buy the property. There is no too much of a benefit to open a company in that state like Delaware or Wyoming because they will only give the secrecy of not revealing the name of the partners but in addition it will not be advantageous to buy property in California with an LLC formed in Delaware. But the best application of a limited liability protection strategy is to make sure that the place you invest in the place to have the company. Second if you are in a state with state income taxes you better form an LLC with 2 members that is the best structure considered to have when you are planning to open an LLC.

What is the correct way to establish an LLC for Real Estate investors in various states for the IRS to consider at the tax level?

The best way is to open an LLC in each state, once you have that and you have 2 members it doesn’t need to have a different name it could the same name in every single state and in addition you can also register the company in Texas and buy property in Minnesota then you also register the company in Minnesota and is going to give you that limited liability protection because you are formalizing your company in that state.

Now once you have that structure and have the strategy on what kind of property you want to buy now the next structure it could be another LLC but we suggest if it’s an S corporation and this will be for administration and will be the owner of the other LLCs and those are the entities that hold the real estate individually, do not concentrate in one single all the properties because it is too much of a risk and if you do have it you better a good liability insurance for protection enough for any kind of liability in real estate.

What type of tax strategy is recommended for Real Estate investors in various states in the U.S.?

The good thing about real estate is that whenever you are operating there is depreciation and when applied to the property as an expense it is usual that the company doesn’t have any profit but losses so the activity itself gives you a tax shelter and that is the depreciation of the property if its residential you depreciate it in 27.5 years or if its commercial you depreciated in 39 years it will give you a big deduction that will make the activity of the company a loss and because of that the loss will contribute to the tax return and not create any kind of taxes.

So, the activity itself of real estate if applied the depreciation it will give you a tax shelter that will shield the income of that real estate activity from taxes. Now, you have to be very careful if you plan to sell it in the future 3 to 5 years because even though the depreciation is expensed out in one year when you sell it you have to retake the depreciation so the depreciation that allowed you to pay no taxes in the year that you operated the property out, in the year you are going to sell the property the depreciation is going to be recaptured and that means profit for you and that means taxes.

We recommend not to take depreciation because that is only going to defer those taxes, the profits are only deferred so if you plan to sell it in 3 years is better not to take depreciation and at the end of the deal you don’t have to recapture that amount of depreciation that creates more taxes for you. If you plan to have separate state investment is the same strategy, even though the states deal with activities separately and each state has its own regulation and laws at the end taxes are federal it is only when you have an LLC with 1 member, and he is the one responsible for taxes. Better is for tax strategy to carry an LLC with 2 members, the same strategy for all states as the LLC is federal then you will not be subject to state income tax because you must have your LLC with 2 members, that is the most basic requirement for real estate investment using a tax shelter as a tax strategy.

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