You own a rental in Temecula or Elk Grove, or are in escrow on one, and someone told you to “put it in an LLC.” The advice was free. The LLC costs at least $800 a year in California and changes how Prop 13 treats the property from then on.
For most owners of one or two financed rentals, a revocable trust plus a large umbrella policy does the job for less. An LLC earns its keep when there is serious equity or a co-owner who is not your spouse. A corporation almost never does.
What does a California LLC cost a rental owner every year?
Under Rev. & Tax. Code § 17941, every LLC organized, registered, or doing business here pays $800, profit or no profit, on FTB Form 3522. The 2021 to 2023 first-year exemption is gone, but SB 122 added section 17941(g)(2): a first taxable year beginning in 2027 through 2029 costs $400. If you are forming one near year end, wait for January.
Section 17942 adds a fee of $900 once California “total income” reaches $250,000, rising to $2,500 at $500,000, $6,000 at $1 million, and $11,790 at $5 million. Because total income is gross income plus cost of goods sold, a landlord counts gross rent, not profit.
Filing Form LLC-1 with the Secretary of State costs $70, and the Statement of Information that Corp. Code § 17702.09 requires within 90 days and every two years costs $20. A limited partnership owes $800 under section 17935, and an S corporation pays 1.5 percent of net income under section 23802(b), never less than $800.
A Nevada or Wyoming LLC escapes none of this. Section 23101 treats an entity as doing business here once its California property passes an indexed threshold ($75,707 for 2025). One house in Menifee clears it.
What does an LLC protect a California landlord from?
Under Corp. Code § 17703.04(a), LLC debts do not become a member’s debts “solely by reason of the member acting as a member.” If a guest falls on a broken stair at the Fontana rental, the judgment reaches that equity, not your Rancho Cucamonga home.
Your own conduct is not shielded. Frances T. v. Village Green Owners Assn., 42 Cal.3d 490 (1986), holds that the corporate form never insulated officers from their own torts, so a self-managing owner who ignored the repair request is sued personally. Section 17703.04(b) imports alter ego rules, and rent deposited to a personal account invites them.
Against personal creditors, section 17705.03(f) makes the charging order the “exclusive remedy,” but subdivision (b)(3) lets a court foreclose and sell the interest. Hellman v. Anderson, 233 Cal.App.3d 840 (1991), allowed that without the other partners’ consent. A single-member LLC has no other partners to protect.
For one rental, insurance does more. An umbrella pays defense costs and the claim; an LLC only limits collection afterward.
Will moving a rental into an LLC trigger Prop 13 reassessment or transfer tax?
Not if proportions match. Rev. & Tax. Code § 62(a)(2) excludes a transfer that changes only the method of holding title when proportional interests stay the same, and section 11925(d) exempts that deed from documentary transfer tax.
The catch: under section 64(d), the owners become “original coowners,” and once more than 50 percent of those interests transfer cumulatively, the whole property is reassessed. Section 64(c) does the same when anyone takes control. No deed records these moves, so the acquirer files BOE-100-B within 90 days under sections 480.1 and 480.2 or owes the section 482(b) penalty of 10 percent of the taxes on the new base year value.
In 926 North Ardmore Avenue, LLC v. County of Los Angeles, 3 Cal.5th 319 (2017), the Supreme Court held the tax under section 11911 “may be imposed when a transfer of a legal entity results in a change in ownership of real property under section 64, subdivision (c) or (d).”
Prop 19 ended the parent-child exclusion for rentals, but deeding a child a 40 percent cotenancy share reassesses 40 percent, while gifts carrying children past half of an LLC’s original coowner interests reassess all of it. A family home in an LLC also loses the section 63.2 exclusion (factored base year value plus $1,044,586 through February 15, 2027), because real property “does not include any interest in a legal entity.” Property Tax Rule 462.180 agrees.
How is rental income taxed in an LLC, and why not an S corporation?
A single-member LLC is disregarded and a multi-member LLC is a partnership by default under Treas. Reg. § 301.7701-3(b)(1), and Rev. Proc. 2002-69 lets California spouses report a community property LLC either way.
The loss rules ignore the entity. The section 469(i) $25,000 allowance phases out between $100,000 and $150,000 of AGI, and the 750-hour professional test in section 469(c)(7) is unchanged. The 20 percent deduction under IRC § 199A is now permanent, with a 250-hour rental safe harbor in Rev. Proc. 2019-38, but the Form 568 instructions confirm California “does not conform.”
Corporations trap appreciation. Under IRC § 311(b), distributing appreciated property is taxed as a sale. C corporation shareholders are taxed again; S corporation owners take the gain on a K-1 with no cash to pay it.
The pass-through entity elective tax, extended through 2030 by SB 132, lets a partnership or S corporation pay 9.3 percent that is deductible federally under Notice 2020-75. With the SALT cap at $40,400 for 2026 under IRC § 164(b)(7), many couples under the $505,000 phasedown gain little, and a disregarded LLC cannot elect.
How does the LLC fit with your revocable trust?
The LLC holds the deed; each spouse assigns the membership interest to the trustee of the revocable trust, and the operating agreement’s successor manager should match the successor trustee.
Community property held directly gets a full step-up at the first death under IRC § 1014(b)(6). In a partnership-taxed LLC, the interest steps up but the building’s inside basis does not follow without a section 754 election; a disregarded spousal LLC avoids that.
A Delaware statutory trust is different: Rev. Rul. 2004-86 treats a passive DST interest as real property for a like-kind exchange. Before exchanging into one outside California, read our post on the Form 3840 clawback.
How do the numbers work for a Roseville couple with two rentals?
A Roseville couple holds a Natomas house (value $560,000, loan $190,000) and an Elk Grove duplex (value $690,000, loan $380,000 at 3.1 percent) in their revocable trust. Gross rent is $84,600 a year. All figures are illustrative.
Option one keeps both in the trust and adds a $2 million umbrella, perhaps $600 a year. There is no entity tax or Form 568, and 12 U.S.C. § 1701j-3(d)(8) kept the lenders from calling the loans over the transfer to the trust.
Option two gives each property its own LLC: $1,600 a year, two Forms 568, no section 17942 fee at this rent. The deeds fit section 62(a)(2), making the couple original coowners twice over. The $370,000 of house equity is walled off from a duplex claim. Option three puts both in one LLC for $800, and a duplex judgment can then reach both.
The loan decides it. Section 1701j-3(d) protects a transfer to a revocable trust, not a deed to an LLC, so the duplex lender could accelerate that 3.1 percent loan. Get written consent first, and ask the title insurer whether the owner’s policy follows the deed.
The LLC route adds Forms 3522 and 568 each April 15, biennial Statements of Information, and BOE-100-B whenever interests move. Either way, contractors paid $2,000 or more get a 1099 under IRC § 6041(a). FinCEN no longer requires beneficial ownership reports from domestic companies. For this couple, option one wins until the equity grows.
| Structure | California annual cost | Prop 13 on transfer in | Liability shield | Income tax and best fit |
|---|---|---|---|---|
| Individual or revocable trust | None | None (§ 62(d)) | None; rely on insurance | Schedule E; one or two financed rentals |
| Single-member or spousal LLC | $800, fee from $250,000 gross receipts, Form 568 | None if proportions match (§ 62(a)(2)) | Inside claims; weak charging order | Disregarded; high equity |
| Multi-member LLC | $800 plus fee, Form 568 | Same; § 64(c), (d) later | Inside claims; charging order | Partnership, PTE eligible; unrelated co-owners |
| Limited partnership | $800 (§ 17935), Form 565 | Same proportional rule | Limited partners yes; general partner exposed | Partnership; no $25,000 allowance for limited partners |
| S corporation | 1.5% of net income, $800 minimum | Same proportional rule | Shareholders yes | § 311(b) gain on exit; rarely right |
| DST interest | No entity of your own | Not your transfer | Passive beneficial owner | Real property for § 1031; exit from landlording |
Frequently Asked Questions
Do I have to pay the $800 California LLC tax if my rental loses money?
Yes. Revenue and Taxation Code section 17941 imposes it on every LLC organized, registered, or doing business in California, profit or not, until the LLC is cancelled. For a first taxable year beginning in 2027 through 2029, it drops to $400. The separate fee starts at $250,000 of gross receipts.
Will putting my rental in an LLC trigger a Prop 13 reassessment?
Not if the LLC is owned in the same proportions as the property, under Revenue and Taxation Code section 62(a)(2). The owners become original coowners under section 64(d), though, so once more than 50 percent of their interests transfer cumulatively, the whole property is reassessed and a BOE-100-B is due within 90 days.
Can a Nevada or Wyoming LLC avoid California tax on a California rental?
No. Under Revenue and Taxation Code section 23101, an entity is doing business in California when its California property exceeds an indexed threshold, $75,707 for 2025. One rental house clears that, so the out-of-state LLC owes the $800 tax and files Form 568 on top of its home state’s fees.
Does my lender have to approve moving my rental into an LLC?
Practically, yes. The Garn-St Germain Act, 12 U.S.C. section 1701j-3(d), bars due-on-sale enforcement for a transfer into a trust where the borrower remains a beneficiary, but has no exception for a deed to an LLC. The lender could accelerate. Get written consent before recording.
Should my revocable trust own the rental or the LLC?
The LLC holds the deed, and your trust holds the membership interest by written assignment. That avoids probate and lets the successor trustee step in. Match the operating agreement’s successor manager to the trust, and consider a section 754 election if the LLC is taxed as a partnership.
Is an S corporation a good way to own California rental property?
Rarely. California taxes S corporation net income at 1.5 percent with an $800 minimum, and under IRC section 311(b) distributing appreciated property out of a corporation triggers gain as if it were sold. The building also gets no inside step-up at death. An LLC avoids both problems.
How North Star Law Firm Can Help
North Star Law Firm advises rental owners across the Inland Empire and the Sacramento area on entity formation, real estate tax planning, and fitting an LLC inside a revocable living trust. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court, so the same person drafts the operating agreement and prepares the Form 568.
If you own or are buying a rental and are weighing an LLC, contact North Star Law Firm or schedule a consultation.