Buying the building your business operates from
Owning your building means holding the real estate your business operates from in a separate entity and leasing it back to the operating company at market rent under a written lease. A claim against operations stops at operations, the property carries its own depreciation, and the rent is deductible to the business. The self-rental rules then govern how that rental income is treated.
Stable law
The main outlay is acquiring the building — the down payment and financing of commercial real estate — which is a substantial commitment separate from the operating business's own cash needs. The recurring cost is modest: a separate return for the property entity and the administration of the lease. A CPA models the depreciation and the self-rental treatment, and an attorney prepares the lease and forms the holding entity. Because depreciation begins when the property is placed in service, the structure and lease should be settled at closing rather than after the fact.
Key points
- Owning your premises means a separate entity holds the real estate and leases it to the operating company under a written lease at market rent.
- The rent is a deductible expense to the operating company and rental income to the property entity, which also claims the building's depreciation.
- Under the self-rental rules, net rental income from property leased to a business you materially participate in is generally treated as non-passive.
- A net loss on that same self-rented property generally stays passive, so the structure should not be built to absorb other passive income.
- An attorney forms the holding entity and drafts the lease, and documented market rent such as comparable listings is what an examiner asks for first.
What is it?
When a business rents its premises from an unrelated landlord, the rent leaves the family entirely. When you own the building through a separate entity and lease it to your own operating company, that same rent stays within your control: it is a deductible expense to the operating company and rental income to the entity that owns the real estate. The building also generates depreciation deductions of its own.
The structure has a protective side as well. Holding the real estate in a separate entity keeps it apart from the operating business, so a liability arising in operations reaches the operating company rather than the building. The two functions — running the business and owning the premises — sit in separate legal boxes, connected only by a lease.
The lease is what makes the arrangement respected. It should be written, at a rent that reflects what an unrelated tenant would pay for comparable space, with ordinary lease terms. A rent set too low starves the property entity of income and understates the operating deduction; a rent set too high invites the opposite challenge. Market rent, documented, is the anchor.
The self-rental rules shape the tax outcome. When you rent property to a business in which you materially participate, net rental income from that property is generally treated as non-passive, so it cannot be sheltered by unrelated passive losses. A net loss from the same property, by contrast, generally stays passive. Owners should not build the plan expecting self-rental losses to soak up other passive income.
Statutory basis
Who does it apply to?
Owners who currently rent their premises from a third party and have the means to acquire suitable space instead.
Established operating businesses with stable, long-term space needs where owning is a sensible commitment.
Owners who want to separate the real estate from operating liabilities while keeping rent within their own structure.
Who does it not work for?
- An arrangement with no written lease, where the payments cannot be supported as genuine rent.
- A lease at a rent that is not at market, which distorts both the operating deduction and the rental income.
- An owner expecting self-rental losses to offset other passive income, which the self-rental rules generally prevent.
- A business whose space needs are short-term or uncertain, where owning locks in a commitment that may not fit.
- An owner who cannot fund the acquisition without straining the operating business's working capital.
What does the IRS look at?
- Whether a written lease exists and its terms match how the parties actually behave.
- Whether the rent charged is at market rather than set to shift income between the entities.
- Whether the rental income is correctly treated as non-passive under the self-rental rules given your participation in the business.
- Whether the property entity claims depreciation and expenses properly and separately from the operating company.
- Whether the two entities are respected in practice, with separate accounts and records rather than commingled funds.
What does it cost to fund, and when does the window close?
The main outlay is acquiring the building — the down payment and financing of commercial real estate — which is a substantial commitment separate from the operating business's own cash needs. The recurring cost is modest: a separate return for the property entity and the administration of the lease. A CPA models the depreciation and the self-rental treatment, and an attorney prepares the lease and forms the holding entity. Because depreciation begins when the property is placed in service, the structure and lease should be settled at closing rather than after the fact.
Related strategies
- §1361–1379Choosing and changing your business entityNo outlay
- §168Accelerating depreciation on buildingsCapital outlay
- §162A management company, a holding company, and a management agreementNo outlay
Common questions
- Why hold the building in a separate entity instead of the operating company?
- Separation does two things. A claim arising in operations does not automatically reach the real estate, and the property entity carries its own depreciation, financing, and books cleanly. It also preserves the flexibility to sell the business later while keeping the building, or to bring different owners into each. An attorney forms the holding entity and drafts the lease, since those are legal documents rather than accounting work.
- What does the self-rental rule actually change?
- It changes how the rental income is characterized, not how much of it there is. Rental income is normally passive, but the passive activity regulations recharacterize net rental income from property leased to a business you materially participate in as non-passive. The practical effect is that this income cannot be sheltered by unrelated passive losses, while a net loss from the same property generally remains passive.
- How do I set the rent?
- Set it at what an unrelated tenant would pay for comparable space in the same market, and keep the evidence you relied on, such as comparable listings or a broker's written opinion, with the lease. Keep the lease terms ordinary and follow them in practice, including the payment schedule. Rent set below market understates both the operating company's deduction and the property entity's income; rent set above market invites the opposite challenge, and a figure far from market in either direction is the first thing an examiner questions.
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
If you want to know which of these apply to your business specifically, that is a conversation about your actual numbers — not a seminar example.
Or start with the Free Cash Clarity Audit — A no-cost review of where your business stands and what a planning engagement would target — the firm's own named starting point.
20 minutes with an Accountack advisor. If a technical review is worth your time, the next step is a workshop with Mena — and if there is nothing material to do, he will say so.