if I buy a commercial property and run my own retail business out of one of the available locations in that building. am I able to write off the rents that's my business pays to the property that I own?
I've been a business owner for almost 10 years and have always rented my locations but never owned them I sold my businesses 2 years ago but I'm thinking about going back into business. Rather than me paying $3,000, $4,000 or $5,000 a month or more in rent. I thought about buying a commercial property and just leasing the space to myself. Am I able to set up two separate entities so I can write off the rent that I pay to the commercial property that I may purchase?  While I own several residential real estate properties, I am still ignorant around commercial real estate.
Any thoughts or advice would definitely be appreciated.
[{"id": "i5zzqna", "text": "Yes, you can pay rent to your other business and write it off as an expense. But you have to declare the rent you pay as income for the other (property-holding) entity.", "replies": [{"id": "i5zzw3x", "text": "What are the pros and cons of doing this?", "replies": [{"id": "i6010x0", "text": "I would chat with an accountant as your neck of the woods may have its own set of pros and cons but you would basically be looking at write off opportunities for your business as you invest in your space. I have a client doing this now. We charge a fmv to their business and the building is owned by the family who runs the business. Upgrades etc into the space continue to be classified as xyz expenses and can be amortized   Accordingly.", "replies": [{"id": "i6019p7", "text": "I think speaking to an accountant would be the best thing for me to do. I just wanted to see if this is something that was possible where I guess I'm essentially double dipping. Just trying to find creative ways to keep my expenses much lower.", "replies": [{"id": "i604i1a", "text": "Yes, but talk to a CPA. You would have to charge market rates, but it\u2019s really just a sort of shell game. You would likely set up your investment property as an LLC pass-through. Assuming your other business is a pass-through, rent you pay would be expensed to your business and reported on your taxes as rental income to your property. Talk to a CPA regarding passive gains from your property and any technicalities that may arise from your businesses. You should be fine though.", "replies": [{"id": "i607nyj", "text": "Thank you very much for your input.", "replies": [{"id": "i60d7ba", "text": "The advantage of owning and renting to yourself vs just renting is depreciation and control.  You pay rent to your LLC which owns the building.  The LLC declares that rent income and also gets all the benefits of real estate ownership, such as depreciation and any other legitimate business expenses.  Also since you own the building you control the space your business is in.\n\nIf it's a multi-tenant building, maybe the rents from the other tenants offset the cost of owning the building, so essentially your business gets to occupy for free.  But the main accounting advantage is depreciation.  Good luck!", "replies": [{"id": "i60esra", "text": "Any way to lower my tax bracket is something I'll definitely look into. Thank you for answer", "replies": [{"id": "i61s0mt", "text": "Left pocket / right pocket.\n\n*(Math is hard).*", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "i60pki4", "text": "Its pretty common but you have to make sure it is set up correctly based on the local laws.  You need an accountant to set it up at a minimum. You also will want to consider talking to a local attorney because you may need to set up a separate entity to own the building and serve as the landlord to your other business.  Either way start with the accountant.", "replies": [], "depth": 5}, {"id": "i60rsla", "text": "People have definitely done this and do this. Not reinventing the wheel here. Just dyor", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i6012df", "text": "These are questions for your accountant\u2026 come on man.", "replies": [{"id": "i601so8", "text": "Why would anyone on Reddit want to actually ask the people that they should be asking instead of complete strangers on here who don\u2019t have nearly enough info to provide real guidance.", "replies": [{"id": "i603ofw", "text": "Because they don't have to pay random people on the internet?", "replies": [{"id": "i604f72", "text": "I guess if you\u2019re willing to get bad advice online for free vs paying a few hundred to your accountant to make sure you\u2019re getting sound advice and doing things in the best manner for your business/yourself then go ahead. You\u2019ll be worse off in the long run, sometimes being cheap isn\u2019t always the smartest thing to be.", "replies": [{"id": "i604mfs", "text": "I never said people were doing the smart thing, just trying to understand their rationalization.", "replies": [], "depth": 7}, {"id": "i60wstb", "text": "And why do you think accountants offer the best advice? What are the odds that the one accountant who is helping you has all the answers? Some of the best advice I got was on the internet from strangers - people who have practical, real world experience. Ever heard of collective wisdom?\n\nand if not for sharing knowledge and experiences (and asking questions), wtf are you even on this sub?\n\nthe worst advice a moron can give is asking strangers to not ask other strangers questions.", "replies": [{"id": "i61rwqq", "text": "&gt;What are the odds that the one accountant who is helping you has all the answers?\n\nThe questions the OP is asking aren't even kindergarten questions. He has no ability to buy a commercial building. \n\nHe's a \"businessman\"?\n\nI think not.", "replies": [{"id": "i61t2w3", "text": "I don\u2019t see anything wrong with OP\u2019s questions. Folks who have mom and pop business tends to have basic knowledge of accounting and nothing more. That\u2019s how most people begin their journey anyway. Please stop telling people to go to specialists - they will do it if they understand the gravity but people need to share what they know first and perhaps put a disclaimer that OP needs to talk to a tax consultant or real estate attorney, etc.", "replies": [], "depth": 9}], "depth": 8}, {"id": "i62bdvm", "text": "I think there's a difference between General and specific advice. General pros and cons help folks determine if it's even worth engaging a professional or not.... case specific is definitely a Fool's errand on the web though.", "replies": [{"id": "i62dl93", "text": "Again, I\u2019d challenge you on that. The probability of your accountant or attorney knowing the solution to a specific problem is much less than the general public.\n\nI will give you an example - I had 700K+ income for about 3 years (long story). I had a wealth manager and a tax accountant I was paying over 10k each - whose job was to advice me in legally stashing that money into investments tax free and pay the taxes as I withdraw. Neither of them gave me the best advice. The best advice is something I learnt on my own from internet advisors. Assuming your tax accountant knows everything just because he is charging thousands is stupid as shit.", "replies": [{"id": "i636z59", "text": "Actually I was not challenging you, I was challenging the other guy but that's fine  challenge accepted or whatever", "replies": [], "depth": 10}, {"id": "i64lwxa", "text": "Difference is your lawyer/accountant should carry insurance and in the case of negligent or bad advice you actually have some recourse to recover money. Sometimes talking to a lawyer can be a rubber stamping exercise just so you have someone to blame if it goes wrong.", "replies": [{"id": "i66oiqi", "text": "Dude, \u201cnot best advice\u201d is NOT bad advice. Did you even read what I wrote? I asked my tax accountant and wealth manager what\u2019s the best way to shield my income from taxes. They came up with advices. The one I found online from strangers was 100 times better. What do you want me to sue them with? Are you out of your mind? They are advisories and advices are subjective.", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}, {"id": "i62uurf", "text": "That's a fact. Talk to a professional. \nI have commercial and real estate. I don't pay rent for my commercial portion and I can't write it off. But my boat and car like to be out of the weather in winter", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "i60rtex", "text": "Because it\u2019s free and also you can literally open another tab and fact check what the people tell you. Also less hassle, why would I reach out to an accountant and pay $$ and deal with hassle of that for an idea I\u2019m speculating? Plus a lot of people who have interest in things share their knowledge with each other. It\u2019s not like he went to ask Reddit, he\u2019s under the commercial RE sub, makes sense. He wasn\u2019t asking for the 100% legal breakdown and tax implications etc, he just wanted a jist of yes or no he could do that and looks like he got decent info. \n\nJust my take!", "replies": [{"id": "i60spcp", "text": "He literally asked the pros and cons above this comment train. If that\u2019s not getting into legal breakdown and tax implications I don\u2019t know what is. Especially when it comes to a question like this.\n\nThere is a difference of discussing ideas that involve opinions, like asking about certain type of properties, areas and industries than factual based questions that involve a lot more info then is ever presented and should be asked to professionals that are there to handle those questions like can you rent your building to your business. That\u2019s not an opinion question, it\u2019s a factual questions that requires the answer to come from someone with a strong sense of that questioner\u2019s financial picture.", "replies": [{"id": "i60tv9l", "text": "Uh it\u2019s more of a discussion of what do you guys think or know about this idea in a sub that has a few professionals in it. It\u2019s curious how strongly you feel about this. As a banker myself I\u2019m aware of when professionals should be involved. \n\nHave a good day.", "replies": [], "depth": 7}, {"id": "i6196pr", "text": "Me asking for pros and cons could pretty much be summed up in one or two sentences. I wasn't asking for a detailed breakdown but something general. The fact is I will be hiring a business accountant once I move back to California in about 6 to 8 weeks.  Because I have no one else to speak to I thought that this subreddit which specializes in what I'm inquiring about could offer some general advice.", "replies": [{"id": "i62bkds", "text": "I don't see anything wrong with it. If you were giving us your business incomes and expenses oh, as well as your personal incomes and expenses, acquisition and closing cost of the building along with the pro forma and asking us what specific deductions for depreciation you should take it would be an entirely different matter. Nothing wrong with asking for the high-level", "replies": [], "depth": 8}], "depth": 7}, {"id": "j022f58", "text": "Nah ur a dickhead lmfaoooo", "replies": [], "depth": 7}], "depth": 6}, {"id": "i63805v", "text": "People also forget some other practical things: I pay my accountant thousands of dollars a year but he isn\u2019t going to answer my question today if I send an email to him. He will take his sweet time, and do research and then come back to me. If I want something pronto, I can\u2019t. And a lot of times, you are just doing planning in your mind and need quick and dirty answers. Internet is the best for it. And there are people who are happy to advice. I have advised a ton folks on so many things - I like doing it so I do.", "replies": [], "depth": 6}], "depth": 5}, {"id": "i62v6az", "text": "Because even though they know they need to talk to a professional, they like to get at least a general idea of the situation ahead of time.  It's nice to have an idea of what kinds of things to ask the professional, so you can be somewhat organized when you may be paying anywhere from $100 to $500 an hour for their time.  \n\nAnd sometimes maybe something a professional said didn't sound quite right so people want to ask others if they've had a similar situation and have info to offer.\n\nBecause not every \"professional\" out there knows what they're talking about.", "replies": [], "depth": 5}, {"id": "i6438ni", "text": "Go to the specialists for the details. Reddit is great for brainstorming an idea. \n\nAlso not every accountant has a business owner mindset or knows all the best angles\u2026\n\nIn this case you might create two business entities as well. One as the landlord charging rent, the other as the business owner. That may help protect some of the assets if someone falls on your property and wants to sue you. \n\nA lawyer / tax accountant might offer this advice, but then they might not. No one cares about your business or money as much as you do. Internet is a great place to do some preliminary research.", "replies": [], "depth": 5}], "depth": 4}, {"id": "i60zng0", "text": "\"come on man\" hahaha \ud83e\udd23", "replies": [], "depth": 4}, {"id": "i618qjo", "text": "Because I currently live in AsiaAsia and do not have a business accountant. I'm moving back to California in June and will be looking at commercial property as I will be starting up my retail business again.  Since I have no one else to speak to I decided to go on this subreddit to ask some questions. I hope that answered your question.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i60ovkx", "text": "Pros are your business probably makes way more money than the commercial real estate so you can write off more expenses for the business.", "replies": [], "depth": 3}, {"id": "i6187qc", "text": "You're just going in circles, only it might help is if you had more to write off on a certain business.", "replies": [], "depth": 3}, {"id": "i62g7yl", "text": "You don't have to pay social security taxes on rental income.", "replies": [], "depth": 3}, {"id": "i62pt85", "text": "It\u2019s a wash any way you do it if you are 100% owner of both. Pay more rent the holding company makes more profit and the business less.  If your getting a bank loan the bank will likely want to see the business paying a \u201cmarket\u201d amount of rent", "replies": [], "depth": 3}, {"id": "i639zc5", "text": "As others have mentioned, you may want to engage a tax professional. Have them walk you through the all-in tax implications for various corporate structures and payment (compensation) schemes.\n\nDistributing profits through dividends (corporate tax implications, personal dividend tax implications), paying yourself higher compensation (payroll taxes, personal income taxes), and above-market rents to a \"propco\" entity (eventually manifests as personal income taxes) have different tax rate impacts.\n\nTransferring profits to a separate entity via above-market rents is not unique.", "replies": [], "depth": 3}, {"id": "i649f2t", "text": "The downside is having to pay the debt service on the property if you can\u2019t find tenant for the vacant space and generally the work involved in being a property manager. It could take your time away from your primary business.\n\nIf you can get something for the right price, and the property suits your business needs, owning the building can be a great investment. if you ever decide to sell your business, you could always keep the real estate for extra cash flow. You can structure the lease payment however you want, but the IRS would generally check to make sure you\u2019re paying yourself a \u201cmarket\u201d rate in an audit situation. For example, you could amortize all of your tenant improvements into your rent and use the acquisition loan to fund that expense. If you haven\u2019t bought a building already, finding a knowledgeable commercial real estate broker can help you structure this properly and introduce you to the right accountant and/or lawyers.", "replies": [{"id": "i64oqel", "text": "Thank you for the advice and I'm definitely going to follow up on this.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i6b2ogc", "text": "There may be reasons you want the income to show up in one place vs the other.  Active v passive.\n\nOr maybe the real estate debt has DCR requirements that incentivizes you to pay higher rent, or vice versa on operating business", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i601nr1", "text": "Your accountant would be an amazing person to ask this question. Especially since that\u2019s what they are there for. To provide you guidance on matters related to best practices for your taxes.", "replies": [{"id": "i607k2v", "text": "Thank you for your input.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i604lvj", "text": "Yes, you are able to own and lease the space to your business.  I have several properties/businesses set up in this manner.  The key is to keep everything separate.\n\n1. Create an entity which owns the commercial property.  In this case call it Smith Street, Inc.\n2. Create the business entity.  In this case call it John's Sub Shop, LLC\n3. Create two separate checking/savings accounts for each entity.\n4. Draft a lease between the two entities.\n5. Monthly rent checks are written from John's Sub Shop, LLC to Smith Street, Inc each month.\n6. Each entity files taxes separately.\n\nA few suggestions:\n\n1. Keep the rent on the higher side.  You pay less tax on passive income (rent).\n2. Keeping the rent higher allows you to control the market.  If you ever choose to close the business and lease the property to a Tenant there is a track record of what $/psft rent was.\n3. Take owner withdraws from Smith Street, Inc for primary income instead of cutting checks from John's Sub Sub, LLC.\n4. Always - always - treat the two entities separately.\n\nOwner occupied businesses are common.  Just follow the law.", "replies": [{"id": "i60816h", "text": "Thank you for your input. I've always thought that I was leaving money on the table by just paying somebody else's rent. I remember several years ago I passed up on the opportunity to buy one of my properties and the landlord was willing to do seller financing with very little down. I look back at that with a lot of regret because the rent at that place is double what I was paying 6 years ago.", "replies": [{"id": "i60d6c2", "text": "Im a lender and when someone comes to me for a loan and their business obfuscates the rent, it causes headaches with underwriting.", "replies": [{"id": "i60ener", "text": "I'm not sure if you meant to use obfuscate but how does the business make the rents unclear?", "replies": [{"id": "i60xy2z", "text": "Sorry. I meant no lease and no rent listed on the return(s).", "replies": [{"id": "i61iwdz", "text": "This is why treating each entity as its own is important.  While I own the business and the property, each entity operates independent of each other.   There is a lease.  There is a rent roll.  Both entities have insurance.  Both entities have separate accounting, etc.  Conducting business properly solves many potential headaches.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i61jtlr", "text": "If it is within your financial plan, it's best to own the property.  Businesses are not as guaranteed as real estate.  Example: I have a business that netted $150,000 prior to the pandemic.  It now nets less than $50,000.  The rent I pay my other company is $7,500/mo.\n\nI have decided to close the business at the end of 2022 and lease the property.  I already have three credit Tenants seeking to lease the space at a base rent of $8,500/mo and potentially one company willing to pay $10,000/mo.\n\nReal estate will always hold or increase in value.  In the end, I exit the business and collect passive income from a NNN lease for 15-20 years.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i60d0xl", "text": "This is a great answer", "replies": [], "depth": 2}, {"id": "i60dknc", "text": "&gt;6. Each entity files taxes separately.\n\nAren't single-member LLCs disregarded for tax purposes and you file with your personal taxes?", "replies": [{"id": "i61ij2y", "text": "Yes, however not all entities are LLCs.  OP may create an S-Corp or C-Corp.  LLC was just an example.  Regardless, even with LLCs you need to keep them separate.  An LLC should not be treated as your own account.  It is not.  \n\nNot keeping personal and business accounts separate is the reason people get into trouble.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i62s3ik", "text": "Great answer. Thank you", "replies": [], "depth": 2}, {"id": "i644wnm", "text": "Awesome answer. Thank you.\n\nWhy take the owner draw from the real estate company?", "replies": [{"id": "i64jj4i", "text": "Rent is passive income which is taxed at a different rate than normal income.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i60f2mw", "text": "Yes but you should ask a CPA. Since you own the building and the tenant, you\u2019re one economic unit which might save you more in taxes. And be easier than the two-company shell game.", "replies": [], "depth": 1}, {"id": "i60h209", "text": "look into SBA 504/SBA7", "replies": [{"id": "i60hd9x", "text": "I never knew about this and I'll definitely look into it. Thank you very much.", "replies": [], "depth": 2}, {"id": "i60kasp", "text": "To get an SBA loan your business must have 51% of the space and you can\u2019t use the rents as part of the debt service.\n\nhttps://www.sba.gov/sites/default/files/articles/9_am_SBA_504_LOAN_PROGRAM_-_FAQ_Sheet_-_May_2016.pdf\n\n(See A3)\n\nSet up an appointment with your CPA. Commercial property is quite different than residential.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i61866w", "text": "What do you need to do, if you haven't done it already, it's going to cost segregation study on your building.", "replies": [], "depth": 1}, {"id": "i61rm8g", "text": "You are able to write off any rent for any legitimate business expense to any legitimate business.\n\nIf you pay $3,000.00 a month in rent, you have a $3,000.00 deduction for your business.\n\n(You also have a $3,000.00 income for your real estate).\n\nThere are some opportunities to cause a distinct benefit to occur when transacting thusly but, those are best discussed with your accountant.", "replies": [], "depth": 1}, {"id": "i61x0qh", "text": "Yeah, I plan to do exactly this. I work as an independent contractor in telemedicine, and take it in the ear on taxes on my professional income because I have so little expenses to deduct. With the building I bought, I am going to rent an office suite; because of depreciation the rental income will be taxed at a much lower rate.  All of this is fair and above board, I talked it over with my accountant. You do have to be formal about it as noted above. In addition, you can\u2019t use way more often space than is reasonable for your business or pay your self", "replies": [], "depth": 1}, {"id": "i61x3l2", "text": "Pay a dramatically higher rent than Typical market price. Hope this helps.", "replies": [], "depth": 1}, {"id": "i62zx47", "text": "Yes", "replies": [], "depth": 1}, {"id": "i639jlq", "text": "Yes and you can acquire it with only 10% down using sba 504", "replies": [], "depth": 1}, {"id": "i63tupa", "text": "In Reddit we trust", "replies": [], "depth": 1}, {"id": "i78fumc", "text": "I\u2019m not 100% sure if you can write it off but that set up is called OpCo PropCo (Short for operating Company and property company), there\u2019s also substantial benefits to the asset company receiving the rent. What\u2019s the term up and see if it works for you", "replies": [], "depth": 1}, {"id": "i92ddrv", "text": "There is a Reddit feed (Trying to find it again) where a guy asked Reddit for tax advice and ended up going to Federal Prison for 3 years after following the advice of random Redditors. I have seen hundreds of people on Reddit ask questions like \u201cI was sexually assaulted what should I do?\u201d or \u201cI am thinking about seriously hurting myself, should I talk to a professional?\u201d ABSOLUTELY! The answer is, YES! \n\nNo person should EVER ask Reddit for advice that requires a professional.", "replies": [], "depth": 1}]