What Is the Best State to Form Your Investment Real Estate LLC?

What Is the Best State to Form Your Investment Real Estate LLC?

If you’re looking for real estate LLC information, you’ll quickly realize this is a complex topic with many moving parts that can affect your needs and action plan when it comes to forming your real estate investment business.

State laws can be wildly different: There are various fees, tax rates, liability laws, requirements for Registered Agents and other state-specific LLC factors you should consider. This article is meant to be informative and spark some ideas to help you move to the next step. However, because of tax implications, before you make an official decision about where to form your real estate LLC, we recommend speaking to a CPA or seeking the services of specialists who help real estate investors manage their property assets.

Which State Is Best for My Real Estate Investment LLC?

It is very common for real estate investors to form LLCs in order to manage their property investments. Sometimes, it’s in your best interest to set up shop in your home state, where you live and conduct most of your business. However, if you have real estate investments in several states (or live close to a more advantageous state), you might shop around.

Even if you choose to create your company outside of your home state, remember that every state in the U.S. requires you to have a Registered Agent in the state where you form your LLC. That’s why there are credible Registered Agent services to aid investors in taking this step through a trustworthy resource. Some Registered Agent services, such Incfile’s, can cost as little as $99 per year. This can be a minimal expense when compared with a higher tax rate and other burdens you may face in a state less favorable for your real estate business.

Why Should I Use an LLC to Manage My Real Estate Investments?

Many real estate investors set up LLCs because they are less complicated to form and manage than other business models, such as corporations and partnerships. LLCs can also be easier to benefit from in regards to cash distribution and transfer of equity from one partner to another.

However, some investors mistakenly believe that forming a real estate LLC will automatically protect them from all lawsuits. Sure, an LLC can help protect your personal assets in many respects. But that doesn’t mean you’re off the hook entirely if you get sued! There can be limits on the protections your LLC offers, especially if you co-mingle your personal and business finances or blur other lines between your personal and company matters. Again, it all goes back to state and federal laws, since you have both to contend with.

Is a Series LLC a Good Option for Real Estate Investments?

Some real estate investors with property in multiple states can get a little more creative by forming a Series LLC, which serves as an umbrella company containing multiple LLCs for every property they own in each state.

This option is only available to business owners in certain states — and this would be another circumstance requiring a registered agent in all the states where your LLC was formed. Here are the states where a Series LLC is currently available:

  • Delaware
  • Illinois
  • Iowa
  • Nevada
  • Oklahoma
  • Tennessee
  • Texas
  • Utah

If the Series LLC option affords you the protections and tax benefits that you’re looking for, it could very well be worth the additional paperwork and setup.

How to Decide on a State for Your Real Estate LLC

While you may be tempted to run out and purchase property right now, we urge you to weigh these decisions carefully and get your business structure established in the right state first. It can be difficult and time-consuming to transfer your real estate investments to your LLC after you purchase them under your own name. Here are some things to consider when making your decision.

Weigh Short-Term vs. Long-Term Real Estate Investment Risks

Think about whether you are planning on investing in real estate properties for the short-term or long-term. For investors who just want to flip houses, forming a simple LLC may make the most sense, even if you have multiple properties (and no matter which state they’re in). In this case, you wouldn’t be opening yourself up to the same kind of expenses and risks that long-term owners typically face, such as tenant lawsuits, renovations, and upkeep.

If you’re just starting out as a real estate investor, think about what you want your portfolio to look like in 10 years. This can help you determine what state you should form your LLC in, and what business model you should consider.

For example: Which real estate markets do you know best? Which states have more favorable income tax structures? Do your investment goals include owning a certain number of properties in the next 10 years? Do you want to quickly flip fixer-upper properties for a profit, or do you want ongoing streams of rental income? Do you want to own business properties and become a landlord for corporate tenants?

There are many factors to consider, and your overall investment goals might affect how you want to set up and structure your real estate business. In general, you should be able to use an LLC in any state as a vehicle to own real estate in any other states. However, some states might require your out-of-state LLC to register as a “foreign LLC” in that state, which can mean additional paperwork is required.

Before making your final decision, you should get professional legal and tax advice from a real estate specialist to make sure you’re adequately protected and weighing the pros and cons, risks and upsides, tax implications and more.

Consider State-Specific Tax Concerns

If you’re curious how your state compares to others in regards to tax benefits for business owners, take a moment to visit the State Business Tax Climate Index. Business professionals who want to analyze and compare the benefits and drawbacks of operating in different states use this resource to help inform their decisions.

Again, before you make your final decision, we recommend speaking with a trusted CPA in your state. More than likely, there are several licensed professionals in your area who can help investors choose the best state to hold their property assets.

Once you figure out the best state for your LLC, talk to Incfile about incorporating your business! Incfile’s incorporation experts can help you get your company established so you can be in great position to maximize the return on your real estate investment LLC’s assets.

Are you ready to start a business, form an LLC, or reorganize your business structure to suit the changing needs of your real estate investment portfolio? Talk to Incfile today! Our incorporation experts can help you evaluate your options with state-specific advice.

Ben Gran

Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.