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If you own your business and the building it operates from, self-renting can be a powerful tax-saving strategy, but only if structured properly.
Done wrong, it triggers the self-rental tax trap, where your rental income is taxed as non-passive, but your losses are locked away as passive. In this episode, we explain how to structure self-rentals the right way, avoid IRS red flags, and leverage the IRS Reg 1.469-4D Grouping Election to unlock tax savings.
00:00 - What is a Self-Rental?
Self-rental happens when you own both your business and the building it operates from.
03:15 - How the Self-Rental Trap Works
Rental income from your own property is treated as non-passive, while losses remain passive. Passive losses cannot offset your active business income, creating a mismatch that costs you thousands in taxes.
06:30 - Fixing the Trap: IRS Grouping Election (Reg. 1.469-4D)
The IRS allows you to group the business and rental as one activity for tax purposes. This grouping election reclassifies the losses, allowing you to offset them against business profits.
09:45 - How a Chiropractor Saves $20,000+
A chiropractor earns $500,000 in business profit while the building generates a $100,000 loss due to depreciation and cost segregation. Without the election, the loss is suspended. With the election, the loss offsets business income, reducing taxable income to $400,000.
13:00 - How to Structure Your Self-Rental Correctly
Draft a rental agreement with fair market value rent. Ensure common ownership between the business and property. If the property has unrelated tenants, only the portion used by your business qualifies. Make the grouping election on your tax return the first year you do this.
16:30 - Common Mistakes to Avoid
Disproportionate ownership between the business and property disqualifies you from making the election. Missing documentation or failing to file the election causes the IRS to apply the trap rules, limiting your deductions.
18:36 - Final Thoughts
Properly structuring your self-rental and making the IRS grouping election is the key to turning potential tax traps into powerful tax savings.
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Podcast Host: Mike Jesowshek, CPA - Founder and Host of Small Business Tax Savings Podcast
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🎙 ABOUT THE PODCAST
The Small Business Tax Savings Podcast is your go-to resource for cutting-edge tax strategies designed to help entrepreneurs and small business owners legally slash their tax bills. Hosted by Mike Jesowshek, CPA, this podcast breaks down complex tax topics into clear, actionable, no fluff insights, so you can maximize your savings and keep more of your hard-earned money
