Self Rental Rules For Business Owners

Self rental rules are often referred to when an operating business (typically a corporation) rents real estate from a commonly owned entity, such as an LLC. There are two rules to be aware of that often seem to be overlooked. First, if your LLC is creating a rental loss, you will not be allowed to deduct that loss against your salary from the corporation, as you run into what is called the passive income/loss rule. A passive loss can only be deducted against other passive income. The key component to this example is that a corporate salary does not count as passive income. Second, take it one step further, assume you have investments with other passive activity. If your LLC has rental income this time, and your other passive investments have losses, you will not be allowed to deduct those other passive losses against your income from your LLC rental. The IRS does not allow this, because you have too much control over the commonly owned companies and have the ability to create deductions that you would not otherwise qualify for. Again, these are referred to as the self rental rules. If audited and you have a structure such as described, you should be prepared for it to be challenged.