Paying rent to my real estate LLC

5 Replies

I would like to move my medical practice business (LLC) into a suite of a commercial building (different LLC). I will lease the remainng space to a separate tenant. Can my business LLC pay by real estate LLC rent at market rate? Are there any special rules? Paying myself a rent should help me realize some depreciation and decrease my tax bill, since my commercial building on it's own is not generating any income currently.

You can, technically it’s just one business paying another. Your accountant should be able to tell you the best “rent” to pay yourself to maximize any savings. If you pay a little higher than market, would a bank lend your more due to the higher building income?

I'm neither a lawyer nor an accountant, but I recommend Googling "closely held corporation" and then asking your tax accountant how, if any, the proposed idea might impact your overall tax situation (https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities-5: A closely held corporation is subject to additional limitations in the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate officers.).

I've read that when two closely held corporations owned by the same small group of shareholders do business with each other, the IRS sees a red flag because some people try using this approach to evade taxes.

From my readings of personal finance articles, this additional scrutiny is based on whether there is an "arms length" between the two parties in a transaction.  When two strangers agree on a price for a real estate transaction, for example, the IRS accepts the number as the actual market price.  But when two related parties (for example, parent and child) do a real estate transaction, the IRS takes a close look at the price to make sure there is no tax evasion going on (for example, a reduced capital gain for the parent from the sale of the family home to the child).

@Bharath Raj , 

Yes, That is normal.  

The deductibility of rents between related parties is essentially determined by the facts and circumstances surrounding each case. For this reason, it is wise for the member and the LLC to build evidence at the onset of the lease to support the reasonableness of the rent called for in the lease agreement. This could include documentation of the commercial practices and the rents paid for similar properties in the area at the time the lease is entered into. Additionally, there should be a written lease with the usual and customary lease provisions. The validity of the lease may also be enhanced by evidence that both parties complied with the terms of the lease and that the rents were paid on time. You are not paying yourself a rent, but your Medical practice ( hopefully it is LLC elected as S-corp) is paying a market rent to your business entity, which is LLC. That is eventually coming to you.  If the RE properties were in your name(Not in LLC) and it was rented directly to medical practice as your capacity as an owner, there would be Self - Charge interest rules, but I am guessing the ownership of the RE properties is under LLC whose business activity is rental, so those rules can be bypassed if structured carefully.  When you are doing these kinds of transaction, its best to get professional involved. good luck.