This episode examines the tax complexity of operating land deals across 10+ states without foreign qualifications. Operating in multiple states nearly doubled CPA fees from $3K to $6K due to individual state filings, physical paperwork requirements, and managing state revenue department notices. The strategy focuses on strategic compliance (paying state taxes while skipping expensive foreign qualifications) and evaluating which states warrant the ~$1K foreign qual investment based on deal volume and enforcement patterns.
Key Takeaways:
- Foreign Qualifications Cost More Than Selective Compliance: Paying occasional state penalties and handling revenue department letters is typically cheaper than maintaining $1K+ foreign qualifications in every state where you close deals.
- State Taxes Hit 2-10% of Profits Depending on Deal Volume: Individual state tax obligations ranged from $300 to $1K per state and became material when aggregated across 10+ states, requiring integration into acquisition pricing or waterfall structures.
- Build State Tax Burden Into Your Underwriting: Calculate anticipated state tax percentages at acquisition or structure waterfalls to split tax burden pro-rata with investors rather than absorbing all state taxes as overhead.
Listen to the full episode for the complete breakdown of multi-state tax strategy and how to balance compliance costs against business overhead.
(Podcast transcript below)
Hi, Chris Duff over at Serious Land Capital vacant land funding partner. Today wanted to go over some, tax related items. know it’s everybody’s, favorite topic. but you know, given tax season is, you know, effectively right now or right around the corner, depending on how early you act on things. definitely.
a few notes worth mentioning. So our CPA just went over or sent us back all of our various K1s and individual state tax filings to also send in. We did the most business across the country with tons of different states, I think 10 plus.
over 2024, effectively meaning we were much more spread out geographically compared to how we’ve operated our business in the past. our CPA who we’ve worked with for many, many years, that increased the total fees owed to them.
you know, nearly double from like on average three grand. And we keep very, very good records internally. So normally we try to make it as easy as possible from an accounting perspective, um, to send to our CPA, but you know, given all the individual state filings, effectively doubled the cost. Um, just to, uh, you know, uh, prepare the taxes for our LLC. And, um, there were a number.
of states that also require signatures from a managing member of our LLC and paper filings to be sent to certain state departments and potentially even checks, physical checks associated that can’t be electronically sent or just auto debited from our business checking account.
So it definitely adds some, you know, admin complexity for some of this. And notably, as well as that, you know, we only maintain a core Delaware LLC and we don’t file as a foreign qualification.
LLC and other states that we operate in, you know, there’s a number of times we’ve tried to start working with the title company and they’re like, Hey, you need a foreign qual. And we always push back on that or, you know, worst case just go to another title company versus, you know, having to pay a thousand bucks on average for different States to get a foreign qual. Um, and, you know, we’ve been operating in this business for
five plus years at this point and we’ve never had to go through a foreign call. Like there’s always been a work around each and every time that, you know, deserves its own podcast in and of itself. But when you don’t do that, it can introduce.
kind of legal complexities with the state revenue departments. And so our CPA was kind of managing, you know, some nasty letters that were sent to us. Hey, know, you’re also, he’s not registered a new business. and so, you know, we’re asking for extra fees and so forth. so, you know, we had extensive conversations with, with our CPA and it seems generally, that it’s a situation where.
It’s probably going to be cheaper to just ask for forgiveness versus go through the whole permission process. so that’s still our current game plan at the moment. If we have a little bit of light fees here and there to take care of, or maybe we can know which states are more draconian or throw a bigger fit about our
participating within their state’s economy and not being fully registered, then we can consider, is this worth getting a foreign qual in this particular state? And that’s always a decision we can make at the time of actually pursuing another deal within a subsequent tax year. So it’s not like we have to jump on it immediately because we got a nasty letter here or there.
Um, since, since, know, setting up a foreign call such, know, usually a sub week long process. Um, and if it ends up, don’t do another deal in a certain year, then we can just skip that, uh, process. Um, yeah, but there, uh, you know, besides some of the admin complexity and, uh, extra fees for our tax prep, um, you know, we had to also account for.
a pretty significant amount of extra just state taxes that were going to have to be debited out from our account, either electronically or sent in via paper forms. some of these, depending on the total deals that we were doing and the way the state was calculating the taxes, most of these taxes were…
between like 300 to a thousand dollars on average. So, you you multiply that across, you know, 10 plus states. Like it’s, it’s not an insignificant amount of money that, that has to kind of go all out, out all at once, you know, impacting overhead on top of what, you know, we’re, having to pay through pass through, pass through taxes via the LLC just for federal returns.
You know, as anybody can tell you, know, land business, is, you know, short-term ordinary income, you know, unless you’re matching it up with other real estate assets that have depreciation or long-term kept gains and so forth, or, know, you operate your land business on a long-term kept gain schedule, year plus holds. It’s not routinely something that’s pursued. Usually that would just be if something went terribly wrong.
I don’t think we’ve ever held an asset longer than 12 months and only a handful of assets ever longer than nine months. for the solid returns, very, very solid returns you can get in this industry, your tax burden is naturally going to be higher. So, have to find other creative routes for…
How can I deduct more and have less of a tax burden? Nevertheless, I would rather have a much more successful business earning significant profits and have to the taxes versus the opposite. yeah, that’s kind of a champagne problem as they call it. But as far as how we would structure this going forward, given that we now know
a lot of the individual states requirements and exact calculations, how they handle state taxes. We could start building that into our assumptions, both on a buy price perspective. And again, some of these are a little bit minor, and it depends, right? Like, do we do one deal a year, two deals a year? But you can start breaking down just the anticipated percentage of
Profits that are going to be taxable for certain properties so you can make reasonable estimates on what that number might be You know at the time of acquisition Or you know we can also consider You know building that into the waterfall with the investors who work with us so the tax burden is split on a pro rata
basis because right now, as of last year, we’re eating all of those state taxes from 2024 just out of our own overhead versus having it within the waterfall. So that’s another thing that we’ll be exploring. And again, it’s relatively minor for most properties. But when you have to eat them all at once, it’s a more significant
burden from an overhead perspective. Like doesn’t break the model certainly. But you know, it’s certainly a risk to to operating within this industry. So, you know, we’re just going to have a bit of a better strategy going forward. But, you know, it’s growing pains. Would rather have these pains versus again, you know, being stuck or not making money. And, you know, just
given our ability to underwrite across the country effectively. Like I don’t want to limit ourselves by just saying, hey, we’re only going to focus on one or two geographies, one or two states. You know, we’ve had a lot of success really all across the country. you know, not planning on stopping that anytime soon, you know, just to, for, from, the sake of like a tax burden perspective, like that would just be kind of a poor choice in my opinion.
but yeah, just wanted to share some thoughts and recent Updates in regard to that topic if you all have any thoughts on that, please let me know Otherwise we will just keep things rolling here, but if you were looking for funding serious land capital Lend it daily diligence Facebook group for zero cost review of your land deals
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