NEW CLIENT WITH SELF RENTAL? MAYBE NOT? REQUESTING INPUT, THANKS!
Background:
Taxpayer has 2 SMLLC entities:
1. Operating SMLLC (vet practice)
2. Real Estate Holding SMLLC (owns 2-story commercial building with mortgage)
The Real Estate Holding SMLLC rents entire building to Operating SMLLC under a triple net lease (Operating SMLLC directly pays real estate taxes, insurance, maintenance); Operating SMLLC pays rent to the Real Estate Holding SMLLC. First floor is used by Operating SMLLC; and Operating SMLLC rents (sublease) second floor to 3rd party tenants.
I have been researching proper treatment and practical application in trying to determine whether entire building or just first floor should be treated as self-rental, or not. I may be over-thinking this …
This is what I have come up with:
Since both operating entity and real estate holding entity are SMLLCs, and disregarded, the rent between the 2 SMLLCs is also disregarded, as such: self-rental rule does not apply.
TREATMENT: [rent income and expense are dis-regarded]
(1.) deduct 50% (for first floor) of building expenses [depreciation, mortgage interest, real estate taxes, insurance, etc] on SCH C (SMLLC vet practice)
(2). Record 3rd party tenant rent income from sub-lease on SCH E and deduct 50% (for second floor) of building expenses on SCH E; net income(loss) on SCH E is passive; self rental rules do not apply.
Does this appear correct?
If this is correct, I am getting hung up with depreciation. Should I split the building basis (net of land) between Sch C and Sch E? What if depreciation generates a loss on SCH C? Am I missing anything else?
Feedback is very much appreciated. Thank you!