Posted by Rich-CA on September 22, 2007 at 15:14:08:
There are a couple of different issues here.
First, you do need to register whatever LLC does business in a particular state in that state. You will need to pay a fee, there may be business taxes, and the LLC will need insurance in that state and a checking account to receive rents (and funds for things like insurance payments and repairs), disburse payments (including profits going back to the owner). This is separate from tax treatment.
Funds belong to whatever entity has them. If Master LLC has a checking account and rents from CA LLC are deposited there, then for all practical purposes CA LLC does not exist and its Master LLC that does business in CA.
Commingling of funds occurs when do something like keep company and personal funds in the same checking account and then try and deduct as a business expense something (like a spa membership) that is personal (and the IRS has stated health club and spa memberships are not deductible).
Let’s say I have CA LLC, NM LLC, and UT LLC. In each one I hold title to a single rental property, which of course is doing business in its respective state and needs to be registered there to pay taxes, etc. So far, so good.
I have often read that real estate holding entitles should be further owned by a “Master LLC” (or other business structure), and let’s say it is located in AZ where I live. Each subsidiary LLC would then be classified as a “disgregarded entity” for tax purposes, the Master LLC would obtain the only required EIN for all 4 LLCs, and maintain separate checking accounts/records for each subsidiary LLC as the owner. Sounds very simple for federal tax reporting (and for credit purposes too).
The question I have…
Would “Master LLC” be now cosidered doing business in 4 states and be required to register as a foreign entity in all 3 subsidiary states, in addition to its own home state of AZ? Or could each subsidiary LLCs use the Master’s EIN when filing taxes under its name (such as CA LLC) for income that is attributable to it’s respective state (CA)?
In theory, none of the income would be attriubale to AZ, so Master LLC would only have a federal filing requirement.
I have reviewed many books and articles on RE holding, RE corporate structures/loopholes, and RE taxation strategies and this is one topic I have NEVER seen covered (hint…hint…to any authors readings this)!!
Depending on if you set your LLC to file taxes as a Corp or a partnership. If you set it up to file like a partnership, then the LLCs all map to your personal income taxes. So it would work kind of like this:
AZ + NM + CA = Master + Personal = Your Tax Return
The personal tax return you file in each state shows only the income you made in that state, but it needs to map to your Federal return as some states pull that to make sure you did not hide and $$$ from them they think they have a right to.
I have a CPA in Phoenix who dows this for me. She batch loads my Quickbooks files into their tax software, which spits out the Sched E for each entity. These then map to my personal returns and the net for each state is spit out. I file returns in TX, AZ, CO and CA with my aggregate return being filed in CA.
Sorry noticed upon reading me own post…I would still have to file an AZ return for Master LLC, but what I meant was in theory little or no taxes would be due to AZ since taxes already being paid in the other states.
If you hold properties in different states in one partnership/llc, a state may require you to apportion the income according to a three factor formula. It could hurt you! If you have a property in state A which generates a loss, but your total properties generate income, under the 3 factor formula rules, you would end up allocating income and paying tax to the state with a loss. Even gain from the sale of a property in one state could be allocated to other states. I’ve seen state auditors do it a couple years after the tax is due and assess taxes, penalties and interest. For state purposes, depending on the state tax laws, it may be best to keep each property in a separate llc. Most CPAs will are not aware of these rules.
The whole purpose of registering an out-of-state (foreign) entity is to bring it into the that state’s tax system.
If your business structure is setup where all “doing-business” revenue flows to a natural person’s (individual) tax return, no registration as a foreign entity is required. The case of the Master LLC being taxed as a C-Corp (instead of soleP, partnership, S-Corp) would be the only example where I could see registration as a foreign entity would be required then.
In this specific case, I am leaning toward setting-up Master LLC with S-Corp taxation (another pass-through mechanism to an indivual return). There would be no employees (except perhaps me doing work in the home state where Master LLC is located). Bank account(s) would be the next concern.
As revenue is generated from rentals in 3 different sates, do all checks need to be made out to Master LLC? If so, could that be viewed as comingling of funds and ruin the LLC liabilities protections?
Re: Interstate taxes with LLC hierarchy - Posted by Rich-CA
Posted by Rich-CA on October 05, 2007 at 13:37:23:
In my case I have separate asset companies which have an operating agreement with an in state LLC. The LLCs are in turn owned by a master in a third state where we have no business interests other than the master (it is not my state of residence). The master LLC is held by our living trust as an asset. My CPA handles clients who have multi state Real Estate holdings almost exclusively.
