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  • Renting office space from myself

    Hi Everyone,
    Please forgive me if I'm not using the right terminology, but I am a newbie here. Does anyone have experience with your S-Corp renting office space from yourself? For example, I have an S-Corp for my private practice. I have additional funds to purchase a local nearby property. Can I then have my S-Corp rent this space from myself? My practice is mainly telemedicine and also my business does consulting/writing as well. I figure I could pay myself rather than pay someone else for office space. Any concerns or pitfalls I should be aware of? Thank you in advance!

  • #2
    I’m sure there is a clever way to stage this, but I can’t see the benefit as opposed to just having the S Corp buy the property. That way the S Corp gets all the deductions, while if the S Corp rents from you the deductions will be limited by the passive loss rules.

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    • #3
      Thanks, Larry! Although I am the sole owner now, I guess I'm worried that things might get messy with real estate ownership in the S-Corp if that ever changes in the future. But thanks for your reply! I definitely didn't think about it that way.

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      • #4
        It's a very common arrangement to hold real estate outside of your S-corporation and rent it back to your business. It's usually done for legal reasons, to keep the real estate separate from your operating business where there could be liability.

        What
        Larry Ragman
        Moderator
        Larry Ragman said isn't quite right. The rules around this can be pretty tricky.

        Any rental income or loss is considered passive, which means that you can't deduct passive losses unless you have other passive income. And passive income is subject to the 3.8% net investment income tax.

        And absent any elections, rental income generated from renting to your practice is considered a "self-rental", which means that the income isn't passive income but the losses are still passive.

        The best planning opportunity in your case is to make a grouping election to treat your practice and the rental as a single activity for purposes of the passive activity rules. You can do this so long as there is the same ownership in both activities, which is the case for you. This makes the rental no longer passive. This means if it generates a loss it's deductible.

        You get all the same deductions as if the practice owned the real estate directly.

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        • #5
          I’m glad an expert stepped in, but if I may, one clarifying question about the legal liability issue. I assume you mean to protect the real estate from a lawsuit against the S Corp? I’d love to hear a litigation lawyers take, because my guess is that an aggressive lawsuit would target both the S Corp and the doc individually, which means the real estate would still be at risk. But I am genuinely interested. Have you seen such an arrangement tested in court?

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          • #6
            I don't have a good answer about any liability issues. My experience has been just hearing attorneys recommend it. My stock answer when it comes to any liability questions is to go talk to an attorney.

            I can think of two tax reasons to not own real estate inside of an S-corporation though -

            You can't distribute property from the S-corporation without triggering gain recognition. Let's say the property's been held by the S-corp for a few years and it's gone up in value. If the owner wants to transfer the property out of the S-corp, any unrecognized gain would be recognized on the distribution. A real rare use case, but it's something to consider.

            It's possible to blow the S-election and then you're taxed as a C-corporation. This could happen if you create a second class of stock or admit a non-qualified S-corporation shareholder. If the building's gone up in value now the gain's subject to corporate-level tax as well. Again, not a likely outcome at all but it is possible.

            There's really no benefit to holding real estate in an S-corporation but there are only potential downsides.

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            • #7
              Originally posted by calimd3 View Post
              Thanks, Larry! Although I am the sole owner now, I guess I'm worried that things might get messy with real estate ownership in the S-Corp if that ever changes in the future. But thanks for your reply! I definitely didn't think about it that way.
              I just want to acknowledge that my answer would take you in the wrong direction based on the two answers provided by
              DavidGlennCPA
              Accountant
              DavidGlennCPA ​​​​​​above. Good luck with your real estate buy!

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              • #8
                Originally posted by Larry Ragman View Post
                I’m glad an expert stepped in, but if I may, one clarifying question about the legal liability issue. I assume you mean to protect the real estate from a lawsuit against the S Corp? I’d love to hear a litigation lawyers take, because my guess is that an aggressive lawsuit would target both the S Corp and the doc individually, which means the real estate would still be at risk. But I am genuinely interested. Have you seen such an arrangement tested in court?
                When we did this, it was actually suggested for the opposite benefit. It's to protect the big important business from a lawsuit against the smaller property. Think slip and fall kind of stuff. If the lawsuit went terribly, then the business keeps operating and the rent gets paid to the new owner.

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                • #9
                  Even though it has not been raised so far in this thread. If you were thinking because the S-Corp that owns the real estate is a non-SSTB business, you can claim the QBI deduction. The IRS final Section 199A regulations instituted aggregation rules largely preventing you from doing this.

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                  • #10
                    Thank you everyone, for your responses! So very helpful, thanks again.

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