Charging yourself rent??

Question

Do I charge myself rent for storage? I am storing equipment in a 40 X 110 foot building on my mixed use commercial property. The building would rent for around $1,500/ month. Do I need to write myself a rent check every month to prove income from the property for future refinancing purposes?

I plan to refinance the property in a couple years and what to be able to prove positive income stream

Brian Ky · Answer

As  stated above, it depends. How I would look at it is are you renting the places under the same company that owns the property or under a different entity. For example, if you own company A who owns the building and you own company b that owns the items for which is being stored, then company b would pay company A. This helps reinforce in the eyes of the law they are separate entities should you be challenged. In addition to paying rent, write yourself a lease. But if company A is storing it's own property in it's own building then I doubt you can charge yourself rent. Your accountant/CPA would be the best at clearing the confusion for how to report this in your accounting books.

Gregg Reinbold · Answer

Thank you for the insights.  Steve Babiak's insight on debt to income ratio (DTI) cleared up my thinking that even if I could legally charge myself rent the DTI would count against me for loan purposes anyway.

The property is mixed commercial in a rural area and difficult to find comps for appraisals.  My thinking was that showing rent income on the entire property would make appraisals easier based on total cash flow.

Steve Babiak · Answer

So let's suppose you did charge yourself rent given you think it will benefit you in getting a loan some day. Lender's do like to see income, but they also look at debt to income ratio (DTI) - and your rent that you charged yourself has now become part of your debt obligation.

Now, does that benefit you in the DTI calculation? Let's name your income as X, your debt payment other than this rent as Y, and the rent you called 1500.

DTI without charging rent = Y/X

DTI with 1500 rent = (Y +1500)/(X + 1500)

Plug in some numbers and you will see your DTI is lower without charging yourself rent, and lower DTI is more favorable when getting a loan. Make sure you "normalize" X and Y to be monthly averages here.

Rob Beland · Answer

@Gregg Reinboldthe short and complete answer is no. The IRS does not allow you to convert rental(passive) income to earned income. Basically you can't create a taxable occurence for yourself. Regardless of whether a mortgage company allows it as part of their calculations, its still not legal. Its really not complex at all. You just cant do it. If you have business partners who own the property with you, they can use  the rent you pay on their tax return but that is assuming they dont occupy the property themselves.

Adam Johnson · Answer

The correct answer to your question is...it depends.  I would definitely advise seeking the advice of your accountant before you do anything with this.  I understand what you are trying to accomplish for a financing reason, but the lender will ultimately decide whether to include or deny the income from such a use.  From a tax perspective, it gets complicated (surprise, right?).

I am not giving legal or accounting advice here.  I have a mixed use property that is owned by an LLC that I have 50% interest in.  I own a property management business, also an LLC, that I own 100% of.  My management business leases a substantial portion of the property at a market rent.  When I refinanced this property a couple years ago, the arrangement drew extra scrutiny from the lender because they didn't recognize it as necessarily "arms length".  However, after extra digging and research of the financials of both entities, they decided to include a portion of the rental revenue from the management business' lease.

This is a fairly complex issue and I would advise you to seek more in depth professional advice before making a final decision.  Don't just use either my or other poster's responses.  I have only scratched the surface of what we do and how we do it and my situation may not be identical to yours.

Not sure if that really helped a lot.  Hope it at least gets you pointed in the right direction.

Gregg Reinbold · Answer

I don't see how it would be illegal if  I was charging myself fair market value for the rent.  If I tried to charge myself 10 times market rate it would unethical at a minimum.  But I am just trying to show the true value of the property.  Maybe I could show replacement value of the building?

Brent Paul · Answer

That sounds illegal to do that.  I don't know about charging yourself rent for a property you own.