real estate LLC in Hawaii

[BCPM]

My wife and I are CA residents. We recently acquired a property in Hawaii and would like to transfer the property deed into an LLC. If we open an LLC as a married couple in CA, we can be considered a single member LLC because CA is a community property state. However, Hawaii is not a community property state so if we opened an LLC in HI we’d be considered a multi member LLC  and have to file a partnership return.

We are trying to avoid the multi member LLC status and partnership return altogether.

Is it permissible to create a CA LLC that owns the Hawaii property? If so, would this allow us to file our tax return as a SMLLC? Or would this still require a partnership return be filed in HI?

[Anonymous_ · Accepted solution]

You would still own your interests in the LLC as community property in CA, regardless so you could each file a separate schedule for your individual income tax return (1040).

The schedule, however, would likely be a Schedule E if the property is a rental, however.

You should check with local legal counsel and/or a tax professional.

[Carl]

What benefit is there for you to put the property in an LLC?

If "we" form an LLC, it's a multi-member LLC. Period. A single member LLC can only have one owner.  There could be some issues with transferring a property owned by an individual, to an LLC too. For example, if there's a mortgage on the property I doubt the mortgage holder will allow a change in ownership without incurring the cost of a new loan/refinance in the name of the LLC, as doing that would probably violate the terms of the mortgage making the outstanding balance due immediately when the lender finds out. They will find out too, when the escrowed insurance and property taxes come due.  Not paying "could" result in foreclosure on the property too.  Another potential problem area is with the insurance.  If the property is insured to the lender and individual and there's a claim, the insurance may be able to get out of paying since the individual is not named on the deed as an owner. If the property is issued as a 2nd home, yet it's actually a rental, then the property is not being used for it's insured purpose. Another way insurance can get out of paying. Note that my samples have nothing to do with taxes either.

If this is rental property, putting it into an LLC changes nothing for taxes. It still gets reported on SCH E and nothing concerning the rental property is reported on SCH C. With a multi-member LLC, the data on the K-1's issued will still end up on SCH E of the personal return.

[Anonymous_]

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@Carl wrote:

With a multi-member LLC, the data on the K-1's issued will still end up on SCH E of the personal return.

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As a married couple holding their interests in the LLC as community property in a community property state, they can treat the LLC as disregarded per Rev. Proc. 2002-69 (i.e., no 1065 and no K-1 in that event).

[ayoung88]

Is that true even though the LLC is formed/created in Hawaii?  If the LLC is formed in Hawaii, since Hawaii is a non-community state, I believe it is required to file a the LLC tax return.  Right?

[Vanessa A]

You are correct.  Since the LLC will be formed in HI, if you are choosing the LLC format, then you will need to file the 1065.

A business jointly owned and operated by a married couple is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.

Since you have elected to be treated as an LLC, you do not otherwise qualify for the qualified joint venture, since you are not OPERATING in one a community property state. If the LLC was formed and operating in CA, then you would not need to as a married couple.

You would also need to file a HI N-20 for HI and a 1065 for the IRS.  The LLC would fall under HI rules.