Congratulations! Your operating business (medical, attorney, cpa, construction, etc) has been growing and you're looking at the next step. It's likely buying a commercial property to use as your office.

Under IRS rules if you rent your commercial real estate to your operating business it's classified as a self-rental. As a self-rental any losses are considered passive and any income is considered nonpassive. This is the self-rental trap. That cost segregation you did on the commercial real estate? Useless until you sell. Unless you have other passive income you will not be able to use the passive losses.

So then how businesses get the benefit of buying commercial real estate. It's through a grouping election. You tell the IRS that you are treating the commercial real estate and your operating business as one economic unit. Now your losses from the CRE can offset your operating business income. That's a win! However, there are certain limitations to grouping.

• Rental is insubstantial in relation to the operating business; OR

• Operating business is insubstantial to the rental; OR

• Same proportionate ownership: each owner of the operating business has the same proportionate ownership in the rental activity

Notice only one of these requirements must be met. The last option is usually the easiest and most direct route.

One last important thing: you have to make this election in the first year you have both properties. There may be late election relief. It's important you work with professionals who know which elections to make and when. Tax preparation and planning is more than putting numbers in a software or spreadsheet..

Disclaimer: This post is for general informational and educational purposes only and is not intended to provide tax, legal, or accounting advice. Tax consequences depend on your specific facts and circumstances. Consult with your own qualified tax and legal professionals before taking action.