Using the Series LLC for Real Estate


This post is in: Business, Real Estate
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subsidiariesThe Series LLC works so well for real estate investors that you’d think it was drafted for that one purpose.

At the end of this blog, I’m going to go over two possible issues with the Series LLC. So, please make sure you read all the way through if you’re exploring the Series LLC for your real estate investments.

Asset protection concerns in a litigious society, skyrocketing state fees and aggressive IRS issues have brought us to this point. Let’s go through these issues, one by one, and see how a Series LLC might fit into to your overall business structure plan.

  1. Asset protection. If you have 10 properties that you put all in one entity, you have protected yourself against something that might happen with the properties. And you have protected the properties from a personal judgment. But you haven’t protected the properties from each other. In other words, if one property has an issue that results in a judgment, then everything inside that entity will be fair game for the creditor.

    The solution is to separate out the properties. But that would mean 10 different structures and that’s cumbersome and expensive.

    With a Series LLC, you can set up each property inside a cell. The cells are set up without a separate registration fee and you don’t have to pay anyone to do that work. You can easily do it yourself. A warning here though: Do not do-it-yourself on the Series LLC formation. These are tricky and you need an expert for that. But once it’s done, you’re through FOREVER with paying for formation.

  2. Skyrocketing state fees. One thing you can be sure of in today’s economy is that state fees are going up. They’ve already taken a jump in many states and as money runs out, the recession effects trickle down to the states and the economic stimulus money runs out, look for more fees. That’s one of the best parts of a Series LLC. You’ll save a lot of money. That’s because you don’t need to register the cells. No registration means no fees.
  3. Tax Considerations. In the past, we’ve used Limited Partnerships to hold real estate. There is one possible issue that we’ve warned our clients about for years, now, though. The issue is that a Limited Partnership, by definition means that you have a general partner and a limited partner. The general partner has full control and risk. The limited partner has no control and no risk outside of his investment.
  4. So the asset protection strategy is to hold as much value in real estate as a limited partner.

    But there are two problems with this strategy. First, that means you need one more entity to hold the general partner ownership. And secondly, the IRS might not let you take a real estate loss because you must have active or material participation. And by definition, as a limited partner, you can not.

    A recent Tax Court case may indicate otherwise, so it’s a little confusing exactly what you may end up with.

  5. The Series LLC allows maximum asset protection with active participation.

Now the warning: California wants you to pay for each cell. So, if you live in CA or have investments there, talk to a professional. And in Illinois, a Series LLC must register the creation and dissolution of every cell, although the registration costs are minimal.

Intrigued by the Series LLC? We love it! Learn more about how you can save money and get better asset protection as part of our Coaching program.

We had a standing room only coaching session this past month on Series LLCs. If you haven’t yet become a coaching client, now is the time.

If you sign up for US Tax Aid Coaching for just $67 per month by 5 pm Pacific on Friday, you’ll be able to participate in both of March’s coaching session PLUS get a copy of the Series LLC course ($99 value) and Nexus Handbook ($99 handbook)

You must sign up by Friday at 5 pm to take advantage of this special offer, though.



14 Comments

  1. Megan Hughes says:

    Hi Paige,

    It shouldn’t impact your REP status at all. The rentals are probably reporting on Sch E or on a partnership return, flowing back to your personal return. So moving into a Series LLC would not change that. Let us know if you want more information!

  2. Paige says:

    Live in CA, have 30 rental units across 11 states. Thinking of setting up a NV series LLC (each unit in its own cell) but don’t know how this will affect my Real Estate Professional status for taxes.

  3. Megan Hughes says:

    Hi Patty,

    If you’re buying property in TN, then you might as well set up a TN Series LLC. You’ll save money over the set-up and maintenance fee. Note though, that TN has announced that each Cell in a Series must file a separate franchise tax return each year. Even if you don’t have any income, I think by the time they get through adding on minimums it’s going to be at least $100/Cell. But if you were setting up new LLCs each time it would be at least $300 + $100, so you’re still ahead of the game.

    If you need help converting your LLC into a Series, or you want a quote on establishing a brand new TN Series LLC, let me know – megan@smartbusinessincorporation.com.

  4. Patty says:

    Megan, Hi I just found this site listened to the webinar on series LLCs. I am very interested in the series LLC for real esatae investing. I just bought a rental property in Memphis, TN and set up an LLC in TN. I would like to buy more properties in Memphis in the future and was wondering if I should have a series LLC set up
    in TN or somewhere else?

  5. Megan Hughes says:

    Hi Amy,

    If the property is in the Series, then I don’t think you can UCC the main LLC without the owner’s consent – it is granted separate legal status under Illinois law. Your best bet is to check with an IL attorney as to your borrower’s rights and the lender’s rights.

  6. Amy says:

    Hi,

    I am assisting with a loan to a borrower that is a series LLC in Illinois. Our question is: should we file a UCC against the series LLC or also against the “umbrella” LLC?

    Thanks!

  7. Megan Hughes says:

    Hi Jay,

    The advantage to using 2 locally-incorporated businesses is that you get all of the legal protections under NY law without question.

    The disadvantage is that your costs will all be doubled. With the DE Series, you’ll have some costs to bring the LLC into DE, but it will be less than creating 2 NY entities.

    It’s probably a question best answered by your local atty — there isn’t any caselaw that I know that flat out busts through a Series LLC in a non-Series state, and collapses it. A local attorney can give you updates and the benefit of his/her experience in the state.

  8. Jay says:

    Hi Megan,

    Thanks for answering my question above. Unfortunately, I am in one of the 5 boroughs…I know, YIKES! If I may ask you another question (or two =)) – Because I’m in one of the 5 boroughs (NYC), should I forego the Delaware Series LLC route and incorporate as an S-Corp for my primary (operating) business then, when the time comes to purchase a multi-family property (buy and hold strategy), form an LLC to hold that property? Is there a disadvantage to this?

  9. Megan Hughes says:

    Hi Jay,

    Thanks for your note. If you create a Series LLC in Delaware you won’t have to file a tax return there, but you will have to comply with DE laws concerning renewals. I think they have a $250/year franchise tax fee that all LLCs pay, regardless of whether or not they’re active in the state.

    From NY’s perspective, you will be registering the main LLC into the state. That means complying with all the NY requirements, including the archaic(!!) newspaper publication requirement. Hopefully you’re not in the 5 boroughs, as they can be pretty costly. But, because NY doesn’t have its own Series LLC law yet, you won’t have to go through the publication requirement for all the subsidiaries. Could that change at some point? Maybe — it’s hard to say, but NY is an awfully high tax state.

    You can put the assets in at the main level of the LLC. It is as protected from the subsidiaries as they are from it, as the parent.

  10. Jay says:

    Hi Megan, I had a couple of questions regarding Series LLCs. I am looking to form my Series LLC in Delaware and qualify to do business in my home state of NY for my real estate business venture. I do not plan to purchase or hold any real estate in Delaware but I do plan to make purchases for company use such as construction tools and supplies, office supplies, computer equipment, company vehicle, insurance, etc. I understand I only have to file tax forms in the state I conduct business (operate) in. 1) Should I be purchasing the “company used” items aforementioned under the “Main LLC” (top level of Series) or use a cell for this purpose? 2) NY requires all formations to publish in newspapers which is costly, since I’m qualifying to do business in NY, do I need to pay these fees for all my lower level cells? -Thanks in advance!

  11. Megan Hughes says:

    Hi Chuck,

    Because so many lenders abide by Freddie/Fannie rules, it’s often hard to get financing inside an entity. Usually you’re asked to pull it out into your own name first. My first suggestion would be to do some searching for lenders who deal with LLCs. You can also check out RE forums around the net – it’s certainly a common issue, but I know people are getting it done.

  12. Chuck Schaeffer says:

    Hi Megan, I own a 2 unit investment property that I am having trouble getting a refi on due to the fact it is titled in an LLC. I purchased the property cash using my heloc which is under 3%.The rate is against prime and I know rates will go up and need to lock in the near future. Would you help advise? Thank you! Chuck Schaeffer

  13. Megan Hughes says:

    Hi Salvatore,

    CA is indeed a tough state. I haven’t seen any caselaw that blows through a Series LLC in any state. That doesn’t mean it won’t/can’t happen though – it just hasn’t.

    The thing with states not respecting other state laws is that it starts a slippery slope. A state wants their own laws to be respected. So if CA tramples all over a valid NV structure – i.e., the Series LLC and the inter-cell liability protections – then it risks some tit-for-tat action from Nevada. Will a state care? I don’t know …

    You’re also right about the franchise tax. If you register a Series LLC into California, the FTB has taken the position that each cell is worth $800/year to them. It is a voluntary registration on the part of the Series’ owner.

    However, there can be some special situations where that is not the case. (drop me a line at megan@ustaxaid.com to learn more).

    Ultimately it depends on how you are operating the properties. You’ve got some options.

  14. The series LLC sounds interesting but here in California I have my concerns. To my knowledge their hasn’t been a court ruling on a series LLC that would establish each cells independence from one another. Until the court determines if this structure will stand up I’m not sure I would risk lumping together numerous properties under one “Series”. Furthermore, the California FTB (Franchise Tax Board) charges $800 for each property placed in a series regardless of it being only one series? That is the same fee as if you set up 2 individual LLC’s without having to worry about the court ruling unfavorably against you. Boy they sure do make it hard here in California! Does anyone know different?

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