Self-Rentals: A Tax Trap You Shouldn't Ignore

Do you own a property and rent it to your own business? That’s called a self-rental, and it comes with unique tax implications!

The IRS treats self-rental income as non-passive, even if your other rental activities are passive.  This means rental income is taxed, but related losses may not offset other income. Here’s what that looks like:

Example 1: 

Sarah owns two properties. One is rented to her business (self-rental) and brings in $10,000 profit. The other rental has a $7,000 loss.  She thought the loss would offset the profit — but it didn’t. The $10,000 self-rental income was taxed as active income, while the $7,000 loss was passive and couldn’t be used to offset it.

Example 2: 

Mark had a $5,000 loss from renting his personal property to his own LLC. He also had $80,000 in wages.  He expected the rental loss to reduce his taxable income — but it didn’t. Since self-rental losses are passive, they couldn’t offset his active wage income.

Self-rentals are tricky. Structuring them wrong can lead to surprise tax bills.

Need help making sure your rental setup works in your favor? Let’s talk!