Practical Considerations

Lease Agreements

Ensure that lease agreements are formalized and reflect market rates. This helps demonstrate that the arrangement is conducted at arm’s length.

Separate Entities

Use separate legal entities for the business and the real estate. This separation can help in asset protection and provide clearer delineation of income and expenses.

Consistent Payments

Make rental payments consistently and document them properly. Inconsistent or undocumented payments can raise red flags during an audit.

Consider Grouping

If applicable do cost segregation study to overcome self-rental restrictions.

For further reading, refer to the IRS guidelines on passive activity and material participation ( IRS Pub. 925, “Passive Activity and At-Risk Rules”, and Topic no. 425, Passive activities - Losses and credits) and the detailed regulations under Regs. Sec. 1.469-2(f)(6).