Own the Business and the Building? You May Be Missing a Major Tax Opportunity

It’s a structure I see all the time.

A business owner operates their company through one entity, and the building is owned in a separate LLC. The business pays rent. The real estate entity shows income or loss. On the surface, it all seems straightforward.

But from a tax perspective, it is often not that simple.

I recently worked through this exact issue for a dental practice where the owners also owned the building through a separate entity. The building entity had a sizable loss, while the operating business had taxable income. At first glance, you would think the loss would automatically offset the income.

It did not.

After reviewing the ownership structure, participation, and how the entities worked together, we were able to apply the Section 469 grouping rules and properly report the activities together for passive activity purposes.

The result: approximately $55,000 in federal tax savings.

That kind of result is exactly why I always tell clients not to look at each entity in isolation. Sometimes the real planning opportunity is not in creating something new — it is in understanding the structure you already have.

Why This Happens

Rental real estate is generally treated as a passive activity for tax purposes.

That creates a common problem for business owners:

• the operating company shows taxable income,

• the real estate entity shows a tax loss,

• but the loss does not necessarily offset the business income.

Instead, that rental loss may be suspended and carried forward.

In other words, the deduction is not gone — it is just sitting there, unused, because of the passive activity rules.

That can be frustrating, especially when the losses are real and the business owner is paying tax on income from the related operating entity.

Where Section 469 Comes In

Under the right facts, the rental activity and the operating business may be treated as one economic activity under the IRC Section 469 grouping rules.

This can be especially important when:

• the same owners own both entities,

• the business operates from that building,

• the owners materially participate in the operating business,

• and the two activities are clearly connected.

When the structure supports it, the current-year rental loss may be treated differently than it otherwise would be. That can allow the loss to offset operating income instead of being trapped as passive.

This is where the planning becomes meaningful.

A Real-World Example

In the case I recently worked on, the business owners had:

• an operating dental practice,

• a separate entity that owned the building,

• rental payments between the two,

• and a significant current-year loss in the real estate entity.

By reviewing the full picture — not just one return at a time — we were able to report the activities together under the Section 469 rules.

That changed the outcome significantly.

Instead of letting the rental loss sit unused, it became part of a much more favorable overall tax result.

The federal tax savings were approximately $55,000.

That is not a small technical adjustment. That is real money.

You Cannot Just “Check a Box”

This is not something to do casually or just because it produces a better answer.

The facts have to support it.

Among other things, you want to review:

• ownership percentages,

• how the entities interact,

• whether the owners materially participate,

• how the activity was treated in prior years,

• and whether the proper disclosures are being made.

Done correctly, this can be a very effective planning strategy.

Done carelessly, it can create issues later.

That is why it is important to step back and look at how the entities actually function together, rather than treating every return as if it lives in a vacuum.

Don’t Ignore the Rent

Another issue I see often is that the operating business is not paying enough rent to the real estate entity.

If the building LLC cannot even cover interest expense and other carrying costs, it is worth revisiting the rent arrangement.

The rent should be reasonable and supportable.

Economically, there is often a wash effect:

• one entity gets a rent deduction,

• the other reports rental income.

But the amount still matters, and if the rent is too low, it can distort the tax picture and leave planning opportunities on the table.

In some cases, getting the rent to a more appropriate level can also help with future use of prior suspended losses.

The Bigger Takeaway

If you own both your business and the building it operates from, do not assume the tax treatment is automatic.

It may be right.

It may also be leaving money on the table.

Some of the best tax planning opportunities are not flashy. They come from understanding how the pieces fit together:

• the operating business,

• the real estate entity,

• the rent,

• the ownership,

• and the passive activity rules.

That is exactly what happened here.

A structure that had been sitting in place was not being viewed in the most beneficial way. Once we stepped back and analyzed the relationship between the entities, the tax result improved dramatically.

Final Thought

If you have a business entity and a separate real estate entity, it is worth reviewing whether the current structure and reporting are really working the way they should.

Sometimes the loss is not the problem.

Sometimes the issue is simply how the loss is being treated.

And in the right situation, fixing that can produce a substantial tax benefit.