At a glance
- What it is
- Two entities: an LLC that owns the building, and your operating company that leases it at fair market rent.
- What it does
- The operating company deducts the rent. On your return, depreciation and building costs offset the rent you receive.
- Best fit
- Owners buying or holding business property.
- Main catch
- Rent must be market-rate, with a written lease, and paid like any other bill.
- Not for
- Sole proprietors renting to themselves. The business has to be a separate taxpayer.
Key takeaways
- A separate real estate LLC owns your business building and leases it to your operating company at fair market rent under a written lease.
- It fits S corp, partnership, and C corp owners buying or holding business property, not sole proprietors renting to themselves.
- In the illustrative example, $60,000 of rent the business deducts shows up as only $23,590 of taxable rental income on the owner’s return.
- The catch: if you own both entities, rent mostly moves income between your pockets; the main value is protection, flexibility, and avoiding later tax problems.
Watch the story
A one-minute story about this strategy. Illustrative story; the people are fictional and are not clients. See all story videos.
The numbers
Picture an owner who buys an $800,000 building for their S corp to operate from. $160,000 of the price is land, which can’t be depreciated. The building is held in a separate LLC, and the S corp pays $5,000 a month in market rent under a written lease. Business tax and personal tax are shown separately.
Operating company (business)
For illustration purposes. Tax law may change, which may change these calculations slightly.
| Rent paid to the real estate LLC ($5,000 × 12) | $60,000 |
| Business deduction for rent | $60,000 |
Real estate LLC (reported on the owner’s personal return)
| Rent received | $60,000 |
| Property tax, insurance, and mortgage interest | −$20,000 |
| Depreciation ($640,000 building ÷ 39 years) | −$16,410 |
| Taxable rental income | $23,590 |
Of the $60,000 the business deducts, only $23,590 shows up as taxable rental income on the owner’s return. Rental income also isn’t subject to self-employment or payroll tax. Depreciation is figured on a full year; the first year is prorated by the month the building is placed in service.
Be clear about what this does and doesn’t do. If you own both entities, the rent mostly moves income from one of your pockets to the other. The depreciation would exist either way. The real value is in protection, flexibility, and avoiding a costly tax problem later if the building were held inside your S corp.
Could this strategy work for your business?
In a free tax analysis, your tax strategist checks whether it fits and what it could save, using your real numbers.
How it works
- Hold the property in its own LLC. Usually owned by you personally (or with your spouse), not by the operating company.
- Sign a written lease. Set the rent at what a third party would pay for comparable space, and keep the support for it.
- The operating company pays rent. On a schedule, from the business account, and deducts it as a business expense.
- The LLC reports the rent. Depreciation, property tax, insurance, and interest are deducted against it on your return.
Why not just own it in the business?
- Lawsuits. If the operating company is sued, a building it owns is exposed. A building in a separate LLC is much harder to reach.
- Selling the business. You can sell the company and keep the building, collecting rent from the buyer, or sell them separately.
- Getting it out of an S corp. Moving appreciated property out of an S corp is generally treated as a sale at fair market value, which can trigger tax on the gain. Keeping it out from the start avoids that.
Who it fits
- Owners buying or holding business property: offices, shops, warehouses, clinics.
- Owners of S corps, partnerships, and C corps, where the operating company is a separate taxpayer.
- Owners who may want to sell the business someday but keep the real estate.
When it doesn’t fit
- Sole proprietors and single-member LLCs taxed as sole proprietors, where “rent” would just be paying yourself.
- Owners not willing to keep a lease, separate bank accounts, and separate books.
- Property already titled to the operating company, where moving it now may cost more than it saves.
The rules
- Fair market rent. The business can only deduct a reasonable rent for comparable space.
- Self-rental rule. Net rental income from property rented to a business you materially participate in is treated as non-passive, so it can’t absorb passive losses from your other rentals. A net loss stays passive.
- Depreciation. Commercial buildings are depreciated over 39 years. Land isn’t depreciated. A cost segregation study can speed up part of it.
- Keep the entities separate. Separate bank accounts, books, and insurance. Mixing funds weakens the liability protection.
Risks to weigh
- Rent set too high or too low. The IRS can adjust rent that doesn’t match the market.
- Lender and title costs. Financing, insurance, and transfer costs for a second entity add up.
- Depreciation recapture. Selling the building later generally means tax on the depreciation you claimed.
- Liability protection isn’t automatic. It depends on keeping the LLC properly maintained and the right insurance in place.
How we handle it for clients
With a Cannon & Brown tax plan, we look at how your property is owned, help you support a market rent, keep the lease payments and depreciation recorded correctly behind the scenes, and coordinate with your attorney on setting up the LLC. Because our technology keeps your numbers current all year, we can test this strategy against your real numbers and adjust it as your business changes.
Illustrative example. The business owner and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes an $800,000 purchase with $160,000 of land, $5,000 a month in market rent, $20,000 of property costs, and a full year of straight-line depreciation over 39 years. This page is educational and is not tax or legal advice for your situation; tax rules and limits change.
Brooks leads Cannon & Brown Tax Advisors, a forward-thinking tax firm serving business owners in Oklahoma and beyond. He builds year-round tax strategies that help business owners keep more of what they earn and reach their goals. More about Brooks
Common questions about owning your building in a separate LLC
Can my S corp pay rent to the LLC that owns my building?
Yes, if the rent is what a third party would pay for comparable space, set out in a written lease, and paid on a schedule from the business account. The S corp deducts the rent, and the LLC reports it on your personal return.
Should my S corp own the building instead?
Usually not. A building owned by the operating company is exposed if the company is sued, and moving appreciated property out of an S corp later is generally treated as a sale at fair market value, which can trigger tax on the gain.
Is rent from my own business subject to self-employment tax?
No. Rental income isn’t subject to self-employment or payroll tax. Under the self-rental rule, though, net rent from a business you materially participate in is treated as non-passive, so it can’t absorb passive losses from your other rentals.
Can I sell my business and keep the building?
Yes, that’s one of the main reasons to hold it separately. You can sell the company and keep the building, collecting rent from the buyer, or sell them separately.
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