Renting property to your own business: the self-rental rules

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: When you rent property to a business in which you materially participate, Treas. Reg. 1.469-2(f)(6) makes net rental income nonpassive, so it cannot absorb passive losses from other rentals. Net losses stay passive. The rent can qualify for QBI under the self-rental rule and is generally excluded from NIIT. Rent should be at fair market value.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). When the tenant is your own company, you are also the one writing the rent check, which sounds like a closed loop of tax efficiency. The IRS saw that loop coming in 1988 and installed a turnstile.

The setup is common: you own a business (S corporation, partnership or sole proprietorship), and you own the building it operates in through a separate LLC that charges the business rent. The business deducts the rent, the LLC reports it on Schedule E, and you get liability separation plus a future asset. The tax wrinkles are the self-rental rule under the passive activity regulations, the 199A self-rental rule, and the NIIT treatment. This page covers all three.

CPA Warning Label: The self-rental rule is a one-way door. Profits become nonpassive, losses stay passive, and no amount of grumbling changes the direction of the hinge.

Recharacterization of income

Normally, rental income is passive. That is great if you have suspended passive losses from other rentals, because passive income absorbs them. The self-rental rule shuts that door.

Under Treas. Reg. 1.469-2(f)(6), net rental income from an item of property is treated as not passive if the property is rented for use in a trade or business activity in which the taxpayer materially participates for the year (other than a rental activity). The rule:

• applies per item of property, net of that property's expenses;
• applies whether the business is a sole proprietorship, partnership or S corporation, and courts have applied it to rentals to C corporations too;
• applies even if the property is owned through an LLC or by a spouse filing jointly;
• was upheld by courts against challenges, so treat it as settled.

Why it exists: without it, a business owner could shift active business profit into rent, and use that "passive" rent to soak up tax-shelter losses. The rule recharacterizes the income to prevent that.

Grouping can change the result

Under Treas. Reg. 1.469-4(d)(1), a rental activity may be grouped with a trade or business activity if the activities form an appropriate economic unit and either the rental is insubstantial in relation to the business or each owner of the business has the same proportionate ownership in the rental. Example: you own 100% of the S corporation and 100% of the building LLC. If grouped, the rental and the business are one activity, and the treatment follows the business, which is nonpassive when you materially participate. Grouping elections are hard to undo. See the grouping election.

Losses stay passive

The regulation recharacterizes net rental income. A net rental loss from a self-rental is still passive. That asymmetry is the trap.

When does a self-rental lose money? Early years with large depreciation, especially after a cost segregation study and 100% bonus depreciation (as of Oct 2026, restored permanently for property acquired after Jan. 19, 2025, per IRS guidance), or years with big repairs. The loss is passive and can only offset other passive income. Then, when the building turns profitable, the profit is nonpassive, so it cannot absorb passive losses from your other rentals. Whether the earlier suspended losses from that same building can offset its later profit depends on how the regulations compute the property's net rental activity income for the year, and the answer turns on the specific facts. Treat it as an open question to confirm with a professional before you rely on it, not as a planning tool.

The safer, simpler planning point: be cautious about generating large paper losses on a self-rental building through cost segregation, because the losses may be stuck while the future income is nonpassive. Grouping the rental with the operating business, when the ownership requirements are met, can avoid the mismatch.

QBI self-rental

Section 199A has its own self-rental rule, separate from the passive rules. Under Treas. Reg. 1.199A-1(b)(14), renting property to a commonly controlled trade or business conducted by an individual or a relevant pass-through entity (partnership or S corporation) is treated as a trade or business for the QBI deduction. Common control means the same person or group, directly or indirectly, owns 50% or more of each.

• Benefit: the rental income can be QBI even if the lease is triple net. See QBI and triple net leases.
• Not covered: rentals to a C corporation.
• SSTB rule: if the commonly controlled tenant is a specified service business (health, law, accounting, consulting and others), the portion of the rental to it is treated as part of the SSTB. Above the income threshold ($201,750 single, $403,500 joint for 2026, per Rev. Proc. 2025-32), that can reduce or eliminate the deduction.

NIIT

The net investment income tax regulations include a parallel rule: rental income that is recharacterized as nonpassive under the self-rental rule is treated as derived in the ordinary course of a trade or business, which generally keeps it out of net investment income (Treas. Reg. 1.1411-4(g)(6)). So for a business owner above the NIIT thresholds, self-rental income often escapes the 3.8%. Rental income from other property generally does not. See NIIT on rental income.

Fair rent

Rent between related parties should be what an unrelated tenant would pay for comparable space. Too high or too low each create a different problem:

• Rent too high paid by an S corporation or partnership shifts income from the business to the rental, which can look like an effort to change the character of income. Paid by a C corporation, excess rent can be recharacterized as a nondeductible constructive dividend.
• Rent too low can create a loss on the rental that is passive, and for property rented below fair rental value the IRS can limit deductions under section 280A rules if a family member uses it as a home (not usually relevant for commercial buildings).
• Self-employment tax: rent is generally not subject to self-employment tax, while S corporation owners must pay themselves reasonable compensation. Pushing rent up to reduce wages invites scrutiny.

Document fair rent with a broker opinion, comparable listings, or a written appraisal. Sign a written lease, charge rent on a schedule, and make the business actually pay it. A lease that exists only in your head is not one.

Example

Illustration: Larry owns 100% of an S corporation that runs a machine shop, where he works full time (material participation). He also owns, through a single-member LLC, the building the shop uses. Assumptions: fair rent $72,000, building expenses $18,000, depreciation $20,000, so the building nets $34,000. Larry also owns two duplexes that produce a combined $25,000 passive loss in 2026, and his modified AGI is $240,000 (too high for the $25,000 allowance).

• Without the self-rental rule, the $34,000 of building income would be passive and would absorb the $25,000 duplex loss, leaving $9,000 of net passive income.
• With the self-rental rule, the $34,000 is nonpassive. The $25,000 duplex loss stays suspended. Larry pays tax on all $34,000 of building income.
• QBI: the building is rented to a commonly controlled S corporation that is not an SSTB, so the $34,000 is QBI. Because Larry's taxable income is above the threshold, his deduction may be limited by W-2 wages and UBIA. The building's UBIA of $800,000 supports up to $20,000 (2.5%) under the UBIA prong, enough for the $6,800 deduction (20% of $34,000) on its own.
• NIIT: the recharacterized rent is generally excluded from NII.

Net effect: Larry loses the ability to use self-rental profit against his duplex losses, but gains QBI and likely avoids NIIT on the building. Not all bad. Just not the closed loop he imagined.