Considerations For Business Owners Looking to Rent
Commercial Space That They Own to Their Businesses

As a business owner who rents office space from real estate that you own, it’s important to consider the type of entity that you should place the real estate under. There are a variety of factors that can influence this decision, including your personal tax situation, liability concerns, and future plans for the property.

One option for structuring the ownership of the real estate is to hold it personally. This means that you would personally own the property and receive rental income directly. This option is relatively straightforward and can be beneficial if you have a lower personal tax rate than your business. However, it also means that you are personally liable for any legal issues or debts related to the property, which could put your personal assets at risk.

Another option is to place the real estate into a separate limited liability company (LLC). This can provide some protection against personal liability, as the LLC is considered a separate legal entity from you as the owner. If there are any legal issues or debts related to the property, your personal assets would generally be protected. Additionally, an LLC can offer some tax benefits, such as the ability to deduct certain expenses related to the property.

A third option is to create a real estate investment trust (REIT). A REIT is a type of corporation that invests in real estate and is required to distribute at least 90% of its taxable income to shareholders in the form of dividends. This option can provide some tax benefits and may be appealing if you plan to invest in other real estate properties in the future. However, REITs are subject to a variety of regulations and may not be the best fit for every situation.

Properly structured per above and fiscally, the rental property will generate rental income that, less operating expenses, will generate a net cash profit. Depreciation on the property will cause a tax loss. However, passive loss limitations in the IRS code in most cases will prevent a taxpayer from claiming a loss on their personal income tax returns from the flow through of the loss from the entity to their personal returns through a K-1. However, the taxpayer will end up having net positive cash flow from the property that would not be taxable due primarily to depreciation. While also ultimately enjoying the future benefits of appreciation on the property when it is sold.

Ultimately, the decision of which entity to use will depend on a variety of factors, including your personal tax situation, liability concerns, and future plans for the property. It’s important to consult with a tax professional and an attorney before making a decision, as they can help you understand the legal and financial implications of each option. Additionally, it’s important to consider the long-term goals for the property, as the structure of the ownership entity may impact your ability to sell or transfer the property in the future.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.