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No California Franchise Tax of $800 When Using a California LLC with a Solo 401(k) Plan to Buy Real Estate

There is only one exemption to the California annual minimum franchise tax of $800 and that is for a title holding companies whose sole purpose is to acquire, hold title to, and collecting from real property.

As per California Franchise Tax rules Section 23701(h) and (x), a title holding company whose sole purpose is acquire, hold title to, and collect income from real property and who turns over the entire amount less expenses to the 401(k) plan owner would be exempted from paying the California minimum franchise fee of $800. The rules under 23701(h) state that any corporation or LLC that is owned by an organization referenced in IRC 501(c)(2), which include 401(k) qualified retirement plans, will be considered a title holding company and will be exempt from the CA franchise tax. Section 23701(x) goes a step further than the IRS Tax Code which only references corporations and adds single member LLCs and partnerships as entities that can be treated as title holding companies, so long as they are owned by an exempt organization, such as a 401(k) plan. The language in Section 23701 follows the language in IRC 501(c), which only refers to 401(K) qualified retirement plans and not IRAs as exempt organization. Therefore, a 401(k) plan, but not an IRA can own an LLC in California for the purpose of acquiring, holding title to, and collecting income from real property without being subject to the $800 minimum franchise tax.

How do you apply?

  • An application for exemption is submitted to the Franchise Tax Board – Form 3500 – https://www.ftb.ca.gov/forms/misc/3500.pdf
  • A filing fee of $25 is paid
  • The Franchise Tax Board will then issue a determination

Summary

In order to take advantage of the one exemption to the annual California franchise fee one will need to satisfy the following requirements:

  • Use a 401(k) plan – an IRA is not treated as an exempt organization for purposes of satisfying the title holing company rules.
  • Establish a single member or multiple member LLC in California
  • Apply for the exemption with the California Franchise Tax Board using Form 3500
  • The LLC’s sole purpose must be for the purpose of acquiring, holding title to, and collecting income from real property and who turns over the entire amount less expenses to the 401(k) plan owner

Talk to one of our Solo 401(k) plan experts at 800-472-0646 who can help you learn more about how you can use a California LLC owned by a 401(k) plan to buy property in California without being required to pay the annual minimum franchise fee of $800.

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Posted in Solo 401(k)