There are various state such as Wyoming, Delaware, and or Nevada that are popular with real estate investors and incorporating. I am looking to purchase property. I currently live in Florida. I hear a lot from other investors using LLCs formed in states such as Nevada and Wyoming due it their jurisdictions having a supposedly friendlier tax code and or better asset protection.
In my opinion, real property should be held in an entity domiciled where the property is located.
There are a number of strategies you can employ to help insulate yourself, so I suggest you discuss with a lawyer in private. Most of us here, including myself, offer a free phone consult.
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LLC’s, regardless of the state where they are filed, are excellent legal tools to hold and manage investment properties. They also isolate the risk generated by these properties. The question on how many properties you should put in one LLC depends on their current value and the overall equity. I recommend a benchmark of 300k/one property in each LLC. Imagine 1 LLC owns 4 investment properties. The equity you have in properties A and B is 350k each, and in C and D, the equity is 125k. In case there is a liability issue (a trespasser who gets hurt, a tenant, whoever) in property C, although the equity you have in it is 125k, the directly exposed net worth would be 1m.
As mentioned above, an LLC isolates the risk generated by risky assets, but it does not protect your personal assets. A plaintiff (a tenant, trespasser, whoever) may always try to pierce the corporate veil by holding you personally responsible by theories as negligence or gross negligence.
Therefore, I recommend you to put the sole proprietorship of the LLC 's that control your properties in an entity that is specifically designed for asset protection purposes, such as an asset management limited partnership that is filed in a state with strong charging order rules and a legislative history as AZ.
The Asset Management Limited partnership that controls the LLC's can hold directly your liquid assets (bank and brokerage accounts). This way, you are protecting your investment properties and isolating the liabilities they may cause, and at the same time, protecting your liquid assets. If the total net worth you seek to protect is over the 400/500k benchmark, my advice is to include to your planning a legal tool that provides you an exit strategy that allows you, if necessary, to take (the ownership of ) your assets out of reach of US courts without compromising ownership or control. This set up is completely tax neutral and does not raise red flags with the IRS. I always recommend my clients to stay away from asset protection plans that promise huge tax benefits.
I advise you to schedule a consultation with an attorney that has proven expertise in the area of asset protection planning. An experienced insurance broker (an extensive umbrella policy is important part of your asset protection planning) and a CPA should also make part of your team.
Feel free to call my office for a complementary consultation.
Douglass Lodmell is the nations #1 Asset Protection attorney and has clients in all 50 states, protecting over $4 Billion in client assets. Answers given by him in this forum do not establish an attorney-client relation. He advises to seek a specialized attorney in the area of your interest for legal representation.
Florida is a reasonable place to form LLCs holding real estate from a viewpoint of tax considerations, fees and asset protection. One caveat is that single member LLCs are not as good, solely from an asset protection standpoint, as single member LLCs in other states such as Delaware. I agree that there are benefits to forming in the state where the property is located but if you will be the sole owner of the LLC, I would form under the laws of another state.
Incorporating in a state other than the one in which the property is located may actually cost you more than you anticipated in that the entity will be considered a foreign LLC to the State of Florida, which is where presumably you are buying the property. There are steps you will need to take to ensure that the State of Florida will approve the foreign LLC to conduct business in this state as a foreign corporation.
I am happy to discuss, in a free consultation, what your options are and how best to reach the optimum benefits from forming this type of business entity. You may also want to speak to a licensed CPA to specifically address your tax issues.
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