Donna Bordeaux explains how self-renting property to a business you run can trigger passive loss limits under IRC Section 469. The fix: structure the rental entity so taxable income hits zero by matching expenses to revenue. Get a tax planner if you own property separately from your operating business.
Foreign. Hi, I'm Donna Bordeaux with calculated moves. Do you have a piece of property that you rent to a business that you are materially participating in? You're active in that business. So for example, if you are a contractor and you operate a construction business and you own the building where your offices are located, you may have two separate entities and one rents that property to another. Well, there are a lot of little, little things you need to be aware of, little traps that you can fall into with self rent. Now you have rules here because if the contracting business was doing really, really well, you might try to shift the income over to the rental side to get different treatment of the income. So the IRS has put a message in there where you can't manipulate that income to take the same income at a lower rate just based on which entity you put the money into. So what happens is kind of tricky. It can be a big trap. If you participate in that business, the income for that self rent, we'll call it, that's under Section 469 of the IRS Code. That income from the self rent has the same conditions applied to it as the business that it's operating for. So what we try to do as a strategy is to get that self rent entity to come out to zero, meaning the income is estimated based on the exact expenses that will occur. That is the safest way to operate that type of business. Now if in fact you don't do that and you end up with a loss on the rental side, you will be having a passive loss which can only be deducted if you have passive income. And that's difficult to get. So unless you own grandma's house free and clear and you rent it as a rental property and it generates income, you're probably going to have suspended passive living losses. That's a long way of saying you won't get to deduct those losses. So you just lost some money by having a poor tax plan. If you generated income on that rental property that is taxed as income all day long. So if one year you were up and one year you're down, you don't come out even. It's a trap. So you have to plan very carefully for self rent to make sure that you have the right strategy. Again, my suggested strategy is to get that self rent to come out as close to zero as possible. So if you have separate entities for your business and a piece of property that you use for the business, let us know and see if we can help you get that strategy in place. So that you don't miss out. Also, if you don't have a separate entity, you might want to talk to me about why you should. I'm Donna Bordeaux with calculatedmoves.com Please get in touch. You can visit our website@calculatedmoves.com don't forget to subscribe to our YouTube page and follow us on Facebook. Thank you very much. Have a great day. Sa.
