The video explains the U.S. tax treatment of self‑rental arrangements, where a taxpayer both owns a business they materially participate in and the building the business rents. The IRS classifies rental income as non‑passive but rental losses as passive, creating a mismatch. The presenter introduces the “Dash‑4 election,” which groups the operating business and the rental into a single activity, allowing the rental to be treated as non‑passive because of the taxpayer’s material participation. By conducting a cost segregation study and applying bonus depreciation, a taxpayer can generate non‑passive losses from the rental that can offset the business’s non‑passive income. To qualify, the ownership of the business and the rental must be identical, and each must be insubstantial to the other. The election must be made on the tax return, and the speaker repeatedly advises consulting a tax advisor before implementing the strategy.
Chapters
So oftentimes you'll have a taxpayer that owns and operates a business that they materially participate in, and they also own the building that, that, that business is renting. Right. And this in the eyes of the IRS is called the self-rental. Now, the way the IRS sees this relationship is they see the income. If you have net income from that rental, that rent, that income is non-passive. But the losses, if that rental generates losses, those losses are passive. So it's sort of the worst of both worlds, right? So how do you fix that? What's this self-rental loophole that we hear about? Well, there's this thing called a Dash 4 election. And what a Dash 4 election says is that this operating business activity, this trader business activity, is being grouped with the rental activity. So it's one activity. And because you materially participate in the business, that covers the rental. Now, that rental is not necessarily passive. It's non-passive now. So if you do a cost segregation study and you bonus depreciate, use the bonus depreciation, you can then generate a loss that is now non-passive and can be used against that business non-passive income. Now, there's a couple things you got to make sure you're doing in that the ownership of the business has to be the same as the ownership of the rental, right? You have to make sure that that's a big criteria. Also, that the rental has to be insubstantial to the business and the business has to be insubstantial to the rental. Talk to your tax advisor to kind of explain to you what that means. But the key here is that if you had to prove it, you have to show that the ownership is the same in both the rental and the business, right? So that's a a big thing. But, and then you have to elect this on the tax return, right? So you want to make sure that you handle this properly. So again, these are just strategies that we're kind of putting out there so you know that they exist. But you want to talk to your tax advisor before you do any of this thing because, you know, on the surface, people talk about the self-rental, oh, it's a great thing. I own the building, I own the business, I'm just going to rent from myself and I'm the best tenant ever anyway. So, but you have to, if you want to actually use the strategy to use those losses from the rental against your business income, You have to do this dash for election. You have to do it properly. So make sure you talk to your tax advisor. If you have any questions, I'm happy to help you. Talk soon.
