Self-rental real estate is real estate in which the owner of the real estate also participates as the lessee of that real estate. There are important tax planning implications to be aware of related to self-rentals. The following scenarios are a few of the scenarios in which the real estate would be considered self-rental:
- Taxpayer owns a rental property that rents to an operating entity owned by the same taxpayer
- Taxpayer owns a rental property that rents to another entity that the taxpayer materially participates in as an employee
- Taxpayer owns a rental property that rents to an entity owned by a family member
Income from a self-rental is non-passive, but losses from a self-rental are passive. Income from a self-rental cannot be used to offset losses from a passive activity, which is a trade or business in which the taxpayer doesn’t materially participate. Additionally, taxpayers cannot offset profits from one self-rental with losses from another self-rental.
In regards to tax reform related to the Tax Cuts and Jobs Act, there are several situations taxpayers who own self-rentals should be aware of for tax planning purposes.
- A self-rental essentially takes on the properties of the related operating entity when it comes to being classified as a specified service trade or business (“SSTB”). For example, the self-rental of a building owned by a taxpayer that rents to a medical practice will be considered an SSTB.
- A rental that would normally be considered a triple net lease is not treated as such in terms of qualifying as a trade or business if it is a self-rental. Common control must exist for the self-rental to be considered a trade or business. For example, if a taxpayer has a self-rental triple net lease that rents to an entity that is a trade or business, the self-rental is considered a trade or business as well.