Self Rental: Trap vs. Loophole

Own your business AND the building it rents? You might be stuck in the IRS's "worst of both worlds."

This setup is called a self-rental, and here's the catch:

• If the rental makes money, that income is non-passive
• If the rental loses money, those losses are passive

So the income gets treated as active, but the losses can't offset it. Not a great deal.

The fix: a grouping election under Treas. Reg. §1.469-4 (often called a "Dash-4 election").

It groups your operating business and the rental into one activity. Since you materially participate in the business, that participation now covers the rental too, so the rental is no longer passive.

Why that matters: pair it with a cost segregation study and bonus depreciation, and the rental can generate a non-passive loss you can use against your business's non-passive income.

A few things to get right:

• Ownership matters. The cleanest path is identical proportionate ownership in the business and the building. (Grouping can also work when one activity is insubstantial relative to the other, so ask your advisor how that applies to you.)
• You have to actually make the election on your tax return. It doesn't happen automatically, and once made, it's generally hard to undo.
• 
  

"I own the building, I own the business, I'm the best tenant ever." That part's true. But if you want those rental losses to offset your business income, the election has to be done, and done properly.



This is general education, not tax advice. Talk to your tax advisor before making any moves.