A dentist who owns both their practice and the building can rent the office to the business, creating a $50,000 real-estate loss that offsets practice income. Mark Kohler calls this the Dash 4 structure, which lets real-estate losses bypass passive-loss limits when the owner materially participates in both entities.
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If you're owning a building in your business or for your business, this can be in a separate entity, a separate LLC, but you rent it to yourself, your operating company, you can take the losses on that real estate and offset your business income because they're grouped together as one thing. This real estate is still real property. We can still have a separate entity for asset protection, but the activity of it with the operational business, let's say you're the dentist, okay? You got the dental office, you're drilling and billing all day long, making money. You also own the real estate that your dental practice is in. You own the building. Well, we're taking, let's say you can accelerate depreciation or even just your normal depreciation, you end up with a $50,000 loss on the building. Well, that $50,000 loss doesn't get bottled up over here with your other passive income. It can fly over here now to your dental income and reduce it $50K there. So that's the self-rental rule. So it's got to have common ownership though, and this is the renting to your business.
For you tax advisors out there, it's called the Dash 4, and what you're doing is creating an economic unit, and that's what gets you over the material participation test because you're hours in the ordinary operational business count towards the real estate. So you are exempt from this special rule that just applies to the real estate. It's wonderful.
