Definition
A tax rule preventing an owner from creating artificial passive activity losses by renting property to themselves or their business through a separate entity.
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The self-rental rule prevents tax avoidance schemes where someone rents property to their own business at artificially high rates to generate deductions. For example, if you own an office through an LLC and rent it to your S-corp at inflated rates to create losses in the S-corp, the self-rental rule prevents treating those as passive losses. The rule says rental income from self-rentals is treated as non-passive income, preventing passive loss deductions. The self-rental rule is specifically designed to prevent taxpayers from creating losses they can use to offset passive activity income. Common examples: renting an office space to your own business, renting equipment to your own company, or creating related-entity rental arrangements. The IRS scrutinizes suspected self-rentals carefully. Understanding this rule is important for anyone with multiple businesses or complex ownership structures. Proper structuring (using genuine third-party rentals or partnerships where income/loss pass through fairly) avoids self-rental designation.
Pro Tip
Don't try to create passive losses by renting property to your own business. The self-rental rule specifically blocks this, and the IRS actively enforces it.
Example
A business owner creates an LLC to own their office building and rents it to their S-corp at inflated rates to generate LLC losses. The self-rental rule prevents treating these as passive losses, blocking the tax strategy.