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The Best State for Your Real Estate LLC

Michael Atias, Director OTA Tax Pros
Michael Atias
Director of Tax Services, Instructor

There are those out there that are convinced that Nevada business entities are the optimal solution for any real estate business regardless of type, location, benefit or cost. Others believe it’s Delaware or Wyoming that provide the most benefits for real estate businesses.  The truth is, it isn’t that cut and dry.

So, how does a real estate investor decide which is right for them? The best answer is to consult with a knowledgeable professional who understands the benefits of doing business in each state, so they can advise you based on your circumstances. However, let’s explore a few general principals to consider when deciding which state to use for your real estate LLC.

How to maximize your profits with smart business and tax decisions.

Guiding Principles for Creating an LLC for Real Estate:

  • You Could Hold Title in an LLC filed in the State Where the Property is Located

Conducting rental activity through an LLC is considered doing business in the state where the property is located. If the LLC is the owner of the rental, then state law requires the LLC be registered in the state.

  • Have your Rental State LLC owned by a Wyoming, Nevada or Delaware Member Manager

For instance, because Nevada offers anonymity (meaning no one can discover your involvement with the LLC through the secretary of state or tax filing, and they offer great charging order protections from your creditors), you may decide to set up your LLC there. You could be setting up one Nevada LLC, then make it the member manager of your multiple local LLCs. Your Nevada LLC would extend its anonymity to the local LLCs through the member manager setup.

  • Re-Consider Principal 1 if your State has High Filing Fees

Let’s assume you have 7 properties in California. If you create 7 California LLCs, the annual fee is a minimum of $5,600! An alternative approach would be to set up 7 land trusts to own these properties, then create 7 Wyoming LLCs ($50 a year renewal) to be the beneficiary of the land trusts. This way, you can reduce costs by about $5,000 per year! You will still need an entity filed in the state where the properties are located to manage the tenants. To meet this requirement, you could set up a California Corporation to serve as the property manager and collect all the rents on behalf of the LLCs.

  • You Could Set up a Wyoming LLC for any Flip Deals to Save on Costs

Schedule a Free Tax ConsultationThe general rule among all states is if an entity is engaging in regular and continuous contact with a state, it must register to conduct business in the state. Rental activity is regular and continuous. Flipping  a house is an isolated occurrence. Since you will dissolve the Wyoming LLC after flipping the property,  having engaged in only one transaction, you will not have engaged in anything rising to the level of regular and continuous. After the completion of the fix and flip transaction you could dissolve the Wyoming LLC and set a new one for any future transactions.

Which State Is Best for Your Real Estate LLC?

After establishing a few principles, the question is where do you set up the holding/flipping LLC?

Legal System

Nevada and Delaware have business courts with experienced judges in matters involving business entities. However, this benefit comes at a significant annual cost, $350 for an LLC and $725 for a corporation in Nevada, and $300 for an LLC in Delaware. So, when does the cost justify the added protection? Probably with net worth exceeding $5,000,000.

Anonymity

All three states provide some form of anonymity for business owners; however, the process can differ depending on the entity type. Nevada allows for and requires the use of a nominee manager or officer at the inception of the entity to create an anonymity shield. A nominee manager or officer is someone who serves in either position for the limited purpose of filing the entity’s public disclosure. The nominee does not take any control over the business and is reappointed on an annual basis to maintain the anonymity of ownership/involvement.

Wyoming and Delaware take a different approach to anonymity. When creating either a corporation or LLC in Wyoming or Delaware, no information is collected on the members, managers, officers or directors with the initial filing. Thus, for the first year of formation, the secretary of state does not have any information on the parties controlling the respective business entity.

On an annual renewal basis, however, Delaware and Wyoming diverge. While corporations in both states require the disclosure of directors and officers upon renewal, they also both permit the use of a nominee to protect your identity. Regarding LLCs though, Wyoming, unlike Delaware, requires an annual report. Thus, like Nevada, a nominee is used to protect your identity after the initial filing.

Anonymity Considerations

The primary benefit to a nominee can also be its greatest detriment when it comes to dealing with banks and lenders. We use anonymity to keep our involvement with an LLC or corporation private, but lenders are not comfortable with privacy. Therefore, you should avoid Nevada if you plan on using a mortgage to acquire property in your LLC.  Using Wyoming or Delaware is preferable because neither state lists information on the LLC, thus you have anonymity without the concern.

When opening a bank account for an entity, the bank will typically check the secretary of state’s website to see if you are listed as a manager or officer of the entity. If you have a Nevada entity with a nominee, your banker will most likely require you drop the anonymity and publicly expose your involvement with the entity before an account is opened. Since Wyoming and Delaware do not publish this information the bank will not find any information and will instead look to your operating agreement to see who is involved.

Fees

For LLCs, Wyoming charges $50 to renew, Delaware is $300 or more to renew, and Nevada $350 to renew. Corporations in Nevada are $650 to renew. Depending on the type of business you are conducting, filing fees add up

State Taxes

There are no state income taxes on Nevada, Delaware or Wyoming entities unless the entity is conducting business in the state.

Hopefully, you have more knowledge about setting up an LLC for your real estate investments. To customize your solution and maximize your benefits, we recommend that you speak with one of our advisors.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.