Real Estate is a booming industry. With high profits, comes necessary protection. According to the California Association of Realtors, “Following modest gains in home sales in 2016, California’s housing market will post a nominal increase in 2017, as supply shortages and affordability constraints hamper market activity.” While the boost in earning potential is great, California real estate investors face a unique problem; the State of California. If you are considering investing in California real estate, or if you live in California and are considering investing anywhere, pre-planning is necessary to avoid unnecessary delays and costs when creating your asset protection plan.
Why you shouldn’t form a California LLC
If you need asset protection or tax savings immediately, California is not the place to create your plan. It can take 4-5 months to form your entity. The Franchise Tax Board, also known as the FTB, is no picnic either. If an LLC forms in California to transact business, it will fall under the FTB’s taxing authority. Regardless of revenue, it will face a minimum tax of $800 a year. The extenuating reach of FTB control maintains, regardless of the State of entity formation; “doing business” in California is established if the LLC owner resides in California.
California is strict with business regulations and taxation, which can leave you waiting several months on your LLC approval. If you need an entity set up quickly, especially in real estate, consider establishing a Nevada LLC. These can usually file within 24 hours. After that, you can then register to conduct business in California. This approach will expedite the process of receiving your asset protection and tax benefits, which takes much longer in California.
Creating a Nevada LLC
For real estate investors that hold property in California, forming a Nevada LLC holds many benefits. For one, if you treat your Nevada LLC as a disregarded entity, you’ll reap many tax advantages. If you are a California resident, setting up a Nevada LLC as a disregarded entity will allow your company to be tax exempt, so nothing is attached to your individual return that draws attention from the FTB. If you choose partnership taxation, it will result in a K-1 reported on your California State return. This allows the FTB to access your business filings and force your business to pay $800 per year for your Nevada LLC.
If an investor purchases property in their home state, their first step in protecting the property usually is to create a land trust, then an LLC to hold the beneficial interest of the trust. Since there is no legal requirement dictating the LLC forms in the State where the trust is created, it’s best to take advantage of a state with the most business-friendly laws; like Nevada. Your Nevada LLC should set up a California land trust to hold title to your California property. Deed the property into the trust, then assign the beneficial trust interest to the Nevada LLC. The land trust will need a bank account to receive rents and pay bills. Be sure your Nevada LLC doesn’t manage operations for your California transactions. If your LLC collects the rent, it will then be conducting business in California and be subject to registration. A land trust is not subject to the FTB fees, so by keeping the rental business contained in the trust and not involving the Nevada LLC in the management of the property, it will remain outside of the FTB’s review.
California offers prime real estate and profits for investors, but it can be time-consuming and expensive. You may think that you don’t need a trust to protect your real estate investments, but think again. Trusts help protect you from liens, title claims, and HOA claims. Knowing your options and seeking out a Nevada LLC will minimize costs and maximize protection. To learn more about the benefits of a Nevada LLC that handles California real estate investments, call a Nevada Corporate Headquarters representative today at 1-800-508-1729. We have a wide variety of Nevada corporation services and business solutions geared towards your success. Visit our page, Entities For Real Estate Investors, for more information.