Published:
October 24, 2022

Why you should file your LLC in the state you co-buy

The real estate market today is seemingly getting more expensive by the day. Many people are co-buying a first or second home with friends or family to make it more affordable. With record high home prices, most potential buyers are exploring every avenue to reduce costs—and stress.

When co-buying a home, forming an LLC is one way to reap some extra benefits. Let’s go back to the basics for a few minutes and share what an LLC is, why you should consider co-buying a home with an LLC, and discuss why you should file your LLC in the state you co-buy.

What is an LLC?

The acronym LLC stands for Limited Liability Company. It is a corporate structure that allows individuals and certain entities to come together to own or operate a business. Each owner of an LLC is called a member, and can be managed by one or more of the members, or even a third party manager.  An LLC may have multiple members, but it is also possible to have a single owner as well.

You’ll have to pay state fees to form the LLC and often to maintain it, but these costs are expenses of the LLC that will offset against the income of the LLC, to reduce its tax burden.

Why would you want to co-buy a home with an LLC?

The main benefit of creating an LLC is the tax benefits.

If you plan to rent out your co-buy property as either a short-term rental on Airbnb or Vrbo or through a long-term, traditional lease, most costs associated with the operating of the property may be considered expenses for tax purposes. Some of the common expenses which may be used to offset income include:

  • Repairs
  • Furnishings
  • Supplies
  • Property management costs (if you use a property manager)

Many co-buyers look to improve the property shortly after purchasing it. Whether painting the walls or replacing the appliances, the costs can be expensed. These expenses often completely offset the rental revenue.

Why file for an LLC in the state you co-buy

There are many reasons to form an LLC within the state where the property is located. Most jurisdictions require any entity that does business in their state to form in the state or qualify to do business in the state.  If you formed your LLC in one state, and acquired the property in another state, you may be stuck filing compliance documents in two jurisdictions.

Additionally, most jurisdictions require any entity that does business in their state to pay income taxes in the state. Many states also require any entity formed in that state to pay some minimum income tax—even if it does not do business in the state or at all. Forming an LLC in the state of the property allows the LLC to avoid having to pay taxes in two states.

In addition to limiting your taxes, many lenders and title companies will require that the LLC be formed in the state, or qualified in the state, where the property is located. Let’s look at a quick example.

Let’s say you are purchasing a property in California. If you form a California LLC to own the property, your compliance with California’s LLC law and the payment of LLC taxes to the California Franchise Tax Board would be limited to California.

Let’s say you bought a property in California but created a Delaware LLC to own it. You would then have to file annual reports in Delaware, pay a minimum tax in Delaware, file for qualification in California, abide by California LLC law, and pay the California Franchise Tax Board. Sounds complicated, right? It is.

It is important to note that each owner of the LLC will have to pay taxes in their respective state, and everyone should consult with their tax adviser.  There are also circumstances where an out-of-state entity with an out-of-state property is considered as doing business in California if the entity is managed by someone in California. Contact a CPA for more information, as they should be able to advise if this situation applies.

The housing market is causing enough headaches these days. By filing your LLC in the state you co-buy your property, you’ll minimize extra stresses and you may even save yourself some money, too.

Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.