Using Self-Rental as a Tax Strategy

Self-Rental as a Tax Planning Strategy

We love the self-rental as a tax planning strategy. The self-rental play is where a business owner rents property they own personally to their business. It provides several tax benefits, including the ability to shift income and take advantage of different tax treatments for rental income and business income.

In a self-rental arrangement, the business owner leases property they own to their business. The business is one in which the taxpayer materially participates. The ownership requirements for self-rental properties are as follows:

• The property must be owned by the taxpayer.
• The property must be rented to a business in which the taxpayer materially participates.
• The rental income from the property is generally considered non-passive income.

The business pays rent to the owner and the business can then deduct these payments as a business expense. The owner reports the rental income on their personal tax return.

Considerations and Limitations of Self-Rental

While self-rental can offer tax benefits, it is important to be aware of certain considerations and limitations:



• Fair Market Rent: The rent charged must be at fair market value to avoid issues with the IRS.
• Passive Activity Loss Rules: Although the rental income from a self-rental is considered non-passive the losses are considered passive and may be limited by passive activity loss rules.
• Documentation: Proper documentation and a formal lease agreement are essential to substantiate the arrangement.

Conclusion

Self-rental can be an effective tax planning strategy for business owners, but it requires careful planning and adherence to IRS rules. Consulting with a tax professional is recommended to ensure compliance and maximize benefits.