Land Trusts and Taxation

[dlmcgill]

Are Land Trusts subject to an annual property tax?  If so, how much is it normally?  I know my LLC is taxed $300 annually.  Wondering if the same applies for a Land Trust.

dlmcgill

[mcwagner]

the property within the trust would still be subject to property tax.  the trust itself may have trustee fees, etc.  The LLC beneficiary would be subject to whatever franchise/business/income taxes normal to any LLC.

[aak5454]

I think dlmcgill is asking about fee charged by states for being an entity (i.e. here in Calif is $800/yr and up).  The answer to that is No becuase a land trust is not a registered entity with your state's secretary of state and in many cases is a disregarded tax entity

[dlmcgill]

Thanks for your responses.  I meant my LLC is charged $300 annually for franchise fees  

I was told that to protect my real estate investments it would be better to set up a C Corp. before a Land Trust and then maybe placing the C Corp as a beneficiary of the Land Trust.  What are the advantages and disadvantages of doing it this way?

dlmcgill

[mcwagner]

There are few differences, but serious ones.

Corporate stock is considered an "investment".  As such it is available to satisfy your personal judgement creditors, whether it's IBM or McGill, Inc. doesn't matter.  So when you rear end the guy in the pinto, he sues and you lose, he can be awarded your investments in corporate stock in the judgement.  Now he owns the company that is beneficiary of your trust.  Plus, moving the property out of the trust after the accident may be considered a fraudulent transfer.

Member interest in an LLC, by contrast, is considered personal property by statute.  As such, it is not available to satisfy judgement creditors.  Now the guy can get a charging order against the LLC income, but he cannot obtain ownership.  

That's a BIG difference.

For this difference alone, I ALWAYS recommend the LLC form.  You can still tax it as a corp if you choose, but the structure itself is simply stronger.

Both a corporation and an LLC protect you personally from company liabilities, but only the LLC protects the company from your personal liabilities.

[dlmcgill]

Let me understand you Mark.  For asset protection, a LLC is better (granted my llc was formed in Maryland, which I hear isn't really all that beneficial.  Better to establish in Nevada???).  Is the C Corp mainly just for avoiding or paying little in Cap Gains on rehabs/sell?  Also, how would you suggest maximum protection of assets (both rehabbing and selling and rentals) using Land Trusts, LLC's, and/or a C Corp???

dlmcgill

[mcwagner]

yes, LLC is a stronger form, when properly operated (as with any entity).

I don't know about MD.  In my opinion, NV is overrated unless you live in a high tax state like CA.

LLCs have flexible taxation.  You can choose to tax it as a C-corp, S-corp, partnership or sole proprietor (depending on some particulars) so you can still have an LLC AND whatever tax strategy best fits your needs.

rehabs (aka flips) are purchased with intent to resell.  these are not capital, but are ordinary income.  so cap gains doesn't apply.  C-corp will generally have a lower income tax rate, but it's also harder (and more expensive) to get the income out of the company as cash.  So, which is best depends on your specific circumstances.

My personal residence is in a land trust with LLC as beneficiary.  We hold our other investment properties in a different LLC.

Putting investments in LT is *best*, but usually just holding them inside an LLC is sufficient.  The main point is to not own them in your own name.

[rkmin]

Does putting a property into a Land Trust with your LLC as the beneficiary, then selling the property afterwards help avoid capital gains and/or 1031?

[colvegas]

First off  I am  not givng advise here in any form or fashion.
You never avoid taxes you do however defer them  big difference.
i will let mcwagner take this on but in land trusts the tax is the sole responsibilites of the beneficiaries on their beneficial interest percentage and the trustee from my knowledge has no tax reporting responsibilities.
AS to if land trust affect 1031 exchanges the answer is no it does not here is the actual
benefit regarding 1031 . " Converting realty to personalty, while still qualifying for 1031 Real Estate Tax LIKE-KIND Tax Deferred Exchange exemption."
Hope this helps but like I said taxes is not my qualifed area but as it relates to trusts I do have a good understanding of it.

[William L. Exeter]

No, conveying real property into a land trust does not defer or avoid any income taxes.  The land trust can complete a 1031 exchange.

[dlmcgill]

Hey Mark:

I was told that the IRS does not recognized an LLC as a separate entity from the owner unless there is two or more members.  Is this correct?  Second, how can you choose to tax the LLC as a partnership, C-Corp, or S Corp on the 1040?

dlmcgill

[Dave T]

dlmcgill,

An LLC is an entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by the IRS as one of these types of taxable entities.

Use IRS Form 8832 to tell the IRS how you want to have your LLC treated for tax purposes, unless you take the default election.  A single member LLC defaults to a sole prorietorship unless the LLC elects to be treated as a corporation.  A multi-member LLC defaults to a partnership, unless the LLC elects to be treated as a corporation.

[mcwagner]

To expand a little on Dave's last post:

LLC's electing corporate status can further elect S-corp status.

Once you make the 8832 election, then the LLC becomes, for all tax purposes, the entity selected.

When you elect to tax the LLC as an S-corp, then it IS an S-corp to the IRS in all respects.  It gains all taxation advantages, disadvantages and rules of any other S-corp, files on the same returns, etc.

So, an LLC taxed as a corporation will file an 1120, and will not appear on your 1040.

[dlmcgill]

Mark and Dave:

Thanks for your replies.  That's good stuff!!  
I have been filing the default (sole proprietorship) for my LLC the last 3 years.  Will it raise a red flag with the IRS if I choose to file as a corporation this year?

dlmcgill

[mcwagner]

no.  you can make the election at any time, but once you do you can't change it for 5 years without IRS approval.

so make sure you make the right tax decision for your circumstances.