Renting a Building to Your Own Business
Ordinarily, if you actively participate in a normally passive rental real estate activity such as renting out a building, you can deduct up to $25,000 of nonpassive loss from your income for that activity. This is a special exception to the general rule of disallowing losses in excess of income from passive activities or from renting out personal property. You can thereby also offset the taxes you would have paid on this lost amount.
If you rent a building to your own business, however, you may not be renting the building to make a profit. The general rule for presumption of profit entails your rental income exceeding your rental expenses for at least 3 years out of a period of 5 consecutive years. If this is not the case, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.
Report your not-for-profit rental income as “Other Income”. If you itemize your deductions, you can include your mortgage interest and any qualified mortgage insurance premiums, real estate taxes, and casualty losses on the appropriate lines of Schedule A. Your other rental expenses may be claimed as miscellaneous deductions, subject to the limit of being over 2% of your adjusted gross income. You can report your state or local real estate taxes on Schedule L if you do not itemize your deductions.
Additional information can be found at www.irs.gov in Publication 527 (Residential Rental Income), Publication 535 (Business Expenses), Publication 925 (Passive Activity and At-Risk Rules), Publication 334 (Tax Guide for Small Business).