Definition
The self-rental rule governs the tax treatment when a taxpayer rents property to a business in which they materially participate.
How It Works
When you rent property to your own active business, net rental income is treated as non-passive (so it cannot be sheltered by passive losses), while net rental losses generally remain passive. This asymmetry prevents using a self-rental to artificially generate passive income.
Example
A business owner who owns the building their company operates from and rents it to the company finds the rental profit treated as non-passive income.
Who It Applies To
Owners who rent property to their own active businesses.
Watch-Outs
The rule can defeat planning that assumes self-rental income will be passive, so structure matters. A grouping election may help in some cases.
