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  • Question(s) re: LLC holding overseas real estate

    I am getting ready to buy our first overseas real estate and expected to rent it. Since the entire "business" is done overseas including receiving income/filing taxes in particular country etc., I am considering filing LLC in Nevada, appointing a registered agent in Nevada and put overseas property under it.

    I live in California and alternatively have LLC filed locally and pay annual minimum franchise tax of $800 or more if I collect more rent  :x . However, my long term plan is to buy more properties overseas (roughly 10 in the next 10 years) and generate side income; this is when tax on LLC in California can be hard.

    I spend barely 30% of my net income every year, have 12 months reserves, 529/401k/HSA/Roth maxed yearly, paying additional principal on home mortgage and have taxable investment account where I would like it to be. Therefore, I expect to collect more pieces of land in the next 5-6 years. Any suggestions? Particularly, downside of LLC in Nevada?

  • #2
    You will not be able to avoid CA taxation by setting up your LLC in another state. According to the FTB, an LLC is “doing business” if any of the LLC’s members, managers, or agents performs activities in California on behalf of the LLC, regardless of where the LLC otherwise conducts business.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Joanna, that helps. Thank you.

      Comment


      • #4
        Since you will be a member of the LLC, LLC income will flow-through to you via K-1.

        Note also that if you own 100% of the LLC (including with a spouse), it is a single-member LLC and won't offer much asset protection alone.

        You also need to analyze the acquisition of the real estate from the foreign perspective: does local law allow local real estate to be owned by a foreign entity?

        You will also need a local bank account to collect rental income and pay expenses on the property.  That bank account will likely be reportable on the FBAR form (FinCEN 114) and IRS Form 8938.

        (The above does not constitute specific legal advice and it does not establish an attorney-client relationship.)

        Comment


        • #5


          Since you will be a member of the LLC, LLC income will flow-through to you via K-1.
          Click to expand...


          If there is only one member, it will be a SMLLC (Single Member LLC), reportable on schedule E of Form 1040 (no K1 needed).


          Note also that if you own 100% of the LLC (including with a spouse), it is a single-member LLC and won’t offer much asset protection alone.
          Click to expand...


          To clarify, this rule applies to CP (Community Property) states. Anyone reading this who does not live in a CP state (as of the date of this response) must file a partnership return and results will be reported to the owners via K1.

          I happen to think an LLC offers quite a bit of asset protection, whether a SMLLC, partnership, or LLC electing to be taxed as an S-corporation. The asset protection is what is afforded to the owner's assets that are outside the LLC against acts inside the LLC.


          You also need to analyze the acquisition of the real estate from the foreign perspective: does local law allow local real estate to be owned by a foreign entity?
          Click to expand...


          My understanding is that foreign real estate will be owned by a local entity (if s/he uses a CA LLC). If the LLC is formed in NV, you are correct that it will be considered a foreign LLC in CA.


          You will also need a local bank account to collect rental income and pay expenses on the property.  That bank account will likely be reportable on the FBAR form (FinCEN 114) and IRS Form 8938.
          Click to expand...


          Good advice.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            Johanna, thanks for your comments.

            Single-member LLCs do not offer as good asset protection as multi-member LLCs and Family Limited Partnerships (FLPs).  There have been court cases where a single-member LLC has been penetrated by creditors.  Here is what one federal court stated:

            “Because the Trustee became the sole member of Western Blue Sky LLC upon the Debtor’s bankruptcy filing, the Trustee now controls, directly or indirectly, all governance of that entity, including decisions regarding liquidation of that entity’s assets . . . . [I]t is hereby ordered that the Trustee, as sole member, controls the Western Blue Sky LLC and may cause the LLC to sell its property and distribute net proceeds to his estate. Alternatively, the Trustee may elect to distribute the LLC’s property to the bankruptcy estate, and, in turn, liquidate that property himself. . . .”

            In re: Albright, Case no. 01-11367 ABC, U.S. Bankr. Dist. Co., April 4, 2003.

             

            Let me clarify my comments about the "foreign perspective":  If the intention is to purchase and own offshore (i.e., non-US) real estate in the name of a US entity (e.g., Nevada LLC), then one must examine the laws of the offshore jurisdiction to determine whether the Nevada LLC (which would be considered to be "foreign" by the offshore jurisdiction) can own the real estate.

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            • #7


              Single-member LLCs do not offer as good asset protection as multi-member LLCs and Family Limited Partnerships (FLPs).  There have been court cases where a single-member LLC has been penetrated by creditors.  Here is what one federal court stated:
              Click to expand...


              Yes, I agree, but we're speaking in the realm of probability for the most part here. I'm not recommending that SMLLCs go the way of the buggy whip because of what one federal court stated and I bet you aren't, either.

              Regardless, I appreciate your insight and hope you stick around. I think we could use a few more lawyers here.

              Well, maybe just one or two.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                Johanna, thank you very much for your kind welcome.

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                • #9
                  Good discussion. Thank you, both Johanna and Asher.

                  1) Will form a foreign entity in respective country to handle transactions and have a member assigned along with me and spouse (multi-member LLC).

                  2) I already have foreign bank account earning interest and file FBAR/8938 annually.

                  3) Alternatively, I can just have properties under my personal name and some on spouse's name and have a power of attorney to execute day to day transactions in foreign country. The role of LLC is solely for asset protection.

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                  • #10




                    Will form a foreign entity in respective country to handle transactions and have a member assigned along with me and spouse (multi-member LLC).


                    Be aware of the US compliance requirements for your ownership of the foreign LLC, such as IRS Form 5471 if the LLC is considered a Controlled Foreign Corporation, Form 8938 to report your ownership, etc.

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                    • #11
                      Thank you Asher.

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