Should the building my business operates from be in a separate LLC?

A business that owns its own building usually holds the property in a separate entity and leases it to the operating company at market rent under a written lease. A claim against the operations then stops at the operations, the property carries its own depreciation, and the owner builds equity instead of paying rent to a landlord. The self-rental rules govern how the rental income is treated.

Key points

A business that owns its building typically holds the property in a separate entity and leases it to the operating company under a written market-rate lease.
Holding the building in its own entity means a claim against business operations generally stops at the operating company and does not reach the real estate.
The property entity depreciates the building on Form 4562, and a cost segregation study can accelerate deductions on shorter-lived components.
Under the section 469 self-rental rule, net income from renting to the owner's own business is treated as non-passive while a net loss stays passive.
A lease that does not resemble an arm's-length arrangement weakens both the liability protection and the deductions.

Why hold the building in a separate entity?

When a business owns the building it operates from, the sound structure is to hold the real estate in one entity and run the business in another, with a written lease between them. The operating company pays rent to the property entity at a market rate, just as it would to any landlord.

The protection reason is the clearest. Real estate is a valuable, durable asset, and operating a business is where most lawsuits come from. If the building sits inside the operating company, a claim against operations can reach the property. Holding the building in its own entity means a claim against operations generally stops at the operations. It works in reverse too: a problem with the property, such as a premises injury, does not automatically reach the operating business.

How does owning the building change the tax picture?

Owning the building turns rent into equity. Instead of paying a landlord, the operating company pays the property entity, which uses the rent to service the mortgage and cover costs, and over time the owner builds equity in an appreciating asset.

The property entity depreciates the building and its components on Form 4562 and reports the rental activity on Schedule E or Form 8825. Commercial buildings are depreciated over a long recovery period, but a cost segregation study can identify shorter-lived components such as fixtures, finishes, and site improvements and accelerate those deductions. The operating company deducts the rent it pays as an ordinary business expense.

What do the self-rental rules require?

The self-rental rules are the part owners most often miss. When the same people own both the operating company and the property that leases to it, section 469 and its regulations treat the rental differently from an ordinary passive investment. Net rental income from property leased to a business in which the owner materially participates is recharacterised as non-passive. A net rental loss from the same arrangement stays passive and cannot freely offset wages or business income.

The practical effect is that self-rental losses cannot shelter unrelated income the way an ordinary passive investment might, while self-rental income cannot be used to absorb passive losses from other activities. The numbers should be modelled before the structure is set, especially where a cost segregation study would create a large first-year loss.

What are the limits, and who sets it up?

The lease is not a formality. It should be written, at a market rent supported by comparable space, with normal terms for who pays taxes, insurance, and maintenance. A lease that looks nothing like an arm's-length arrangement undercuts both the protection and the deductions. The two entities need separate accounts and records.

The structure suits an owner committed to the location with a stable business. It is a poor fit for a business likely to outgrow or leave the space within a few years, because the transaction costs of buying and later selling a building are significant. An attorney drafts the entity documents and the lease. A CPA models the depreciation, applies the self-rental rules, and keeps the rent defensible against comparable market rates.