With the limitation on itemized deductions in 2018 there are several schemes floating around for circumventing the tax code. One of the more popular schemes is the idea of a self rental. Think about it – if I won’t be able to itemize in 2018 due to the doubling of the standard deduction and the limitation on the state and local tax deduction there must be some way I can get a tax benefit from home ownership.

Why not put my home in an LLC and rent to myself? The LLC will get to deduct all the mortgage interest, real estate taxes, utilities, etc. Wouldn’t this be a great idea? Unfortunately, and quite obviously, this doesn’t work out like you may think.

Phantom Income/Losses

The main reason why renting your own home to yourself doesn’t work is because it creates phantom income and phantom losses. Let’s say you want to put your home in an LLC and rent the home to yourself for $1,000 per month. That $1,000 per month is not a deduction on your personal return and is instead rental income on your LLC. If you don’t have enough expenses to offset that rental income then you just created phantom taxable income.

Well, what if your expenses exceed your rental income? If your expenses exceed your taxable income then you’ll run into passive activity loss limitations. If you don’t have passive income to offset those passive rental losses then chances are you’ll have non deductible losses. Even if you did have passive income there are special IRS rules that prevent taxpayers from benefiting from self rental losses. Therefore, you’ll either have non deductible losses or create taxable income.

Creating A Mess In The Future

Even if you were to run your self rental at a break-even you would still run into major tax problems in the future. If you have a self rental then chances are you’re taking a depreciation deduction on your home to offset the rental income.

This depreciation deduction slowly reduces the tax basis in your home which increases your taxable gain upon sale. Even worse, when you sell the home you will have to pay tax at ordinary income tax rates on the lesser of the gain from the sale or the depreciation previously taken.

If you didn’t have a self rental but instead owned the home you would be able to sell the home tax free. If you lived in the home for 24 months out of the proceeding 5 years you would may be eligible to deduct up to $250,000 in capital gains ($500,000 if you’re married filing jointly) from the sale of your home. Therefore, it makes no sense to have a self rental on your home in this situation.

When Does a Self Rental Make Sense

The ideal form of a self rental is in a legitimate business operation. For example, let’s say you own a barbershop and also own the building in which the business operates. This is an ideal scenario where it is beneficial to separate the building from the actual business.

Since rent is both an allowable business deduction and taxable rental income you won’t create phantom income or losses. Instead you are just moving a portion of your profits from business income to rental income. This will not only reduce self employment tax but will also limit your liability.

If you separate the business from the rental property then you create a separation of liability. If the business goes under then you can safeguard the building. Vice versa, if there is a lawsuit or lien against the rental property they won’t be able to come after the business assets.

Consult With a Tax Advisor

Before you create a scheme to avoid paying taxes, consult with a tax advisor. Chances are your CPA knows more about taxes than your late night google searches. To protect yourself from unnecessary liability, consult with a tax advisor to see what strategies are best for your unique tax situation.


This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
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2 comments on “Can You Rent To Yourself?

  1. Victor Carabello MD

    Hi Mr. Ramos. Need some tax advise. I’m a physician and I lease office space in a medical office building that I don’t own. I just purchased an old medical office building that is currently being renovated. I plan to move my medical practice to that new location. I don’t want to fall into the “self rental rule” trap and get audited. I want to know can my medical practice pay rent to the LLC that owns the building and still be able to deduct the rental expense, assuming it’s fair market value? If the net rental income on that LLC is a loss (PITI + deprection is > rental income), from what I’ve read about self-rental rules, it will still be considered a passive loss. If so, will be it be able to gobble up passive rental gains from other properties I own?

    • Jeremias Ramos, CPA

      Hi Victor, great question! The situation you’re describing is when a “self rental” actually works. Setting up a separate LLC for the real estate property is a great way to keep the rental property separate from the medical practice.

      Don’t forget to setup a separate bank account in the new LLCs name and pay monthly rent from the medical practice to the LLC. This wil reduce the chances of any issues in the case of an audit or legal dispute.

      In regards to passive losses, if you had passive rental income from other properties then you would in most cases be able to take those passive losses. Also note that the rent paid to the LLC is a business expense for the medical practice and can be taken against income.

      This of course is assuming the general rules apply. If you’d like to discuss the matter in more detail feel free to contact me at thedailycpa@gmail.com and we can setup a phonecall.

      Hope this answer helped!

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