The Perils of Being Your Own Landlord
Q: I recently changed accountants. The current certified public accountant insists that the rent income from my office building, which I lease from myself to my professional solely owned corporation (I'm a veterinarian and this houses my practice), should be entered on Schedule E of the tax code. My previous CPA had always used Schedule C. This change cost me dearly this last year because the deductions I would've received in Section 179 couldn't be deducted. Please clear up this issue for me.
A:Your new CPA has correctly interpreted how your rental-property income should be reported. Rental income or loss generally comes under the passive-loss rules and needs to be reported on Schedule E rather than as "earned" service income, which is reported on a Schedule C and subject to self-employment tax. The Section 179 accelerated-depreciation rules aren't available to you as a non-corporate lessor.
Because you are both the lessor and lessee of the property, you need to be sure that the rent charged is "reasonable" in order for it to be fully deductible by your corporation. You should check with your new accountant to be sure your rent is reasonable -- as well as for a full explanation of how the complex passive-loss rules apply to you, as there are some income-recharacterization rules that come into play when you're the lessor to a business in which you materially participate.
You may want to have your veterinary corporation purchase future Section 179 property, as it may be eligible for the accelerated-depreciation deduction. With proper planning, the use of rental property, whether personal property or real estate, in conjunction with your business can yield favorable tax results.
Janet K. Poppen, president
Poppen & Associates CPA'S P.C.
Editor's note: While the information in Tax Adviser represents the opinion of an expert, it is not legally binding.
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