My Business Rents My Long-Term Rental

By Jason Watson, CPA
Posted Friday, October 10, 2025

This is the cousin to the previous section where your business rents your short-term rental periodically for board meetings or employee retreats. Instead of periodic renting, your business would add another work location by entering into a long-term lease (just like any other office space or condo). Said differently, if your business could use a second office or location, this strategy could be a win win. Keep reading!

Self-Rental Rules

As a reminder, this is a self-rental, and that term has specific meaning. Recall from previous section that a self-rental is an odd dichotomy where your losses are considered passive, and your profits are considered nonpassive. This is to prevent you from artificially creating net rental income (profit) by inflating rents to offset otherwise non-deductible passive rental losses.

Sidebar: This is commonly known as the self-rental trap. We expanded on this in two earlier sections. See my business rents my short-term rental section (just a previous article ago) and three types of income section.

Legitimate Business Purpose

As we discuss in other areas, for this to pass muster, there needs to be a legitimate business purpose. IRC Section 162 requires an expenditure to be ordinary and necessary. Ordinary is one that is common and accepted in your industry. Necessary is one that is helpful and appropriate.

If you are an insurance agent in Colorado and would like to purchase a lovely downtown San Diego condo as a second work location, you might have some problems out of the gate. To suggest that you go to your San Diego work location to review financial statements, conduct video meetings with your customers and draft your latest riveting slide deck would likely not be considered ordinary and necessary. In other words, it looks like a disguised second home.

However, you obtain your insurance license in California, and you tell the world you are there to enjoy sunsets, sure, but to also drum up new business, then that changes things. For those business owners that work from their home already, this could be a great way to get the best of both worlds. How?

Tax Efficiency

Your business pays rent and as such your business income is lower. You earn rental income from the self-rental to your business. That transaction offsets, and your tax footprint remains the same. Neat. Now what?

You add in mortgage interest and property taxes that are no longer limited since it is a rental property and not a second home, plus utilities, repairs and HOA dues, and suddenly you are creating tax efficiency by-

• not being limited by mortgage limits on primary and second homes, and
• deducing otherwise personal expenses such as utilities, repairs and HOA dues.

Toss in a cost segregation study for kicks and that first year is incredible. Let’s not forget to keep good records, and maintain and support that business purpose. Oh, and don’t forget too that a formal lease, like you would typically see in a business-to-business environment, complete with money movements between bank accounts is required.

Something to consider when reviewing your tax benefits of rental properties in connection with your overall rental property tax strategy and wealth building initiatives.