You rent the warehouse to a business in which you materially participate as owner and president.
Suppose, for example, that you own two rental properties - an apartment building and a warehouse. Net rental losses on such property, however, generally remain passive. Under the self-rental rule, if a taxpayer rents a property to a business in which he or she materially participates, any net rental income from the property is deemed to be nonpassive. However, some exceptions do apply one is the self-rental rule. Rental real estate activities generally are deemed passive regardless of whether the taxpayer materially participates. A taxpayer “materially participates” in a business if he or she works on a regular, continuous and substantial basis in operations. (The IRC does provide a few exceptions contact your CPA for more information.)So, what distinguishes a passive activity from a nonpassive activity? The IRC defines “passive activity” as any trade or business in which the taxpayer doesn’t materially participate. Typically, a passive activity loss can be used to offset only passive income.
#Non passive income code#
The Internal Revenue Code (IRC) generally prohibits taxpayers from deducting passive activity losses against other income, such as salaries, interest, dividends and income from nonpassive business activities.
A passive activity loss is the excess of the taxpayer’s aggregate losses from all passive activities for the year over the aggregate income from all of those activities. To understand the tax repercussions of self-rental arrangements, you first must understand the passive activity loss rules. Do you rent property to one of your business entities? It may seem like an innocent action, but that “self-rental” arrangement could have significant - and potentially negative - tax repercussions.