Self-Rental Structuring

Self-rental occurs when a property owner leases real estate to an operating business in which they materially participate. Often an overlooked exposure for practitioners, the self-rental rules create asymmetric treatment of income and losses under the passive activity loss rules, triggering unexpected tax liabilities unless structured in advance. If you lease real estate to your own operating entity, the statutory rules below govern your returns by default.

Self-rental occurs when a taxpayer rents property they own to a business in which they materially participate. Material participation is defined under IRC §469 as involvement in the operations of the activity on a regular, continuous, and substantial basis. This scenario is common among business owners who own the real estate used by their business.