Multi-Entity Rental Property Tiered Structure

By Jason Watson, CPA
Posted Saturday, August 3, 2024

Let’s say you have rental properties in Montana, Colorado and Texas. For all the benefits of using an LLC to own your rental property that we discussed previously, you decide to put each property into a separate LLC. However, you also want a holding company to own or “hold” all these LLCs under one entity.

As such, an LLC is created in Wyoming given their low annual costs plus anonymity (other states work too, but Wyoming is nice). Next, LLCs are created in Montana, Colorado and Texas. Keep in mind the order here. The parent, the Wyoming LLC, needs to exist first since the child LLCs will be wholly owned by the parent LLC. In other words, each rental property will be owned by an LLC that has a single-member, and that single-member is the parent LLC.

Should you have some LLCs now, and want to create a holding company later, that is perfectly fine. You simply need to assign your interest in each LLC to the holding company LLC. If possible, creating the parent or holding company first is more elegant and helps with employer identification number (EIN) assignment.

Sidebar: When you are obtaining an EIN for your child or subsidiary LLC where the sole member is another entity, the application process is a bit more clunky and generally cannot be submitted online with the IRS website.

The Wyoming LLC is now a holding company, and with an attorney’s assistance, the Operating Agreement can be crafted as part of your estate planning and orderly transfer of wealth for all your rental properties. There are some other advantages as well if the Wyoming LLC is taxed as a partnership. See our section on using partnerships for rental properties.

You own the Wyoming LLC. It owns the gaggle of LLCs. Each LLC owns its respective rental property.

The Wyoming LLC would generally not be considered doing business in Montana, Colorado or Texas and therefore would not have to register in each of those states (what we call foreign qualification). However, we would recommend that each child or subsidiary LLC be manager-managed. Huh?

An LLC needs a manager. The manager can either be a member or another named person or entity. As such we have member-managed or manager-managed. An LLC that is member-managed as the name suggests is managed by the member, and in this example, the Wyoming LLC.

In working with other attorneys, WCG CPAs & Advisors recommends manager-managed with the manager being you, the human. This helps preserve that the Wyoming LLC is simply a holding company and is not considered doing business in Montana, Colorado and Texas. In other words, you, the human, are directing each child LLC.

However, income tax returns will still be filed in each state (while Texas does not have an income tax, it does require LLCs to file certain annual filings). If your Wyoming LLC is taxed as a partnership (Form 1065), then the entity files these tax returns at the entity level. You, the human, might also have a tax return obligation depending on ultimate taxable income from each rental property.

If your Wyoming LLC is a single-member LLC, and therefore disregarded for tax purposes, you, the human, will file income tax returns in each state even if the rental property ultimately has a loss (each state has the right to inspect your books and records to confirm your tax loss).

A multi-entity tiered structure for your rental property kingdom is a great way to add some layers to your onion including anonymity plus the estate planning benefits.