How To Rent Your House to Your S-Corporation

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It isn’t as easy as you think. Thanks to an arcane rule in the Internal Revenue Code, you cannot deduct your expenses when renting your house to your S-Corporation (Section 280A(c)(6), for those dedicated enough to wade through Code). This rule disallows deductions against rent by an employee to an employer.

You can, however, effectively rent your house to your S Coporation and deduct all expenses – but you have to follow certain rules.

Step 1 – Setup what’s known as an “Accountable Plan” – this must be a written document

Step 2 – Obtain/write a letter from the S Corporation to you as employee explaining why the home office is for the convenience of the employer

Step 3 – Make sure the space is exclusively and regularly used for your business

Step 4 – Submit monthly expense reports for actual home office expenses, such as proportionate real estate taxes, homeowners insurance, mortgage interest, general repairs and maintenance, utilities and depreciation. (Make sure you allocate these based on the square footage of the space or some other reasonable method. Also make sure you do not depreciate the land portion of your house purchase cost).

Reimbursements of legitimate business expenses are not taxable to you, and are fully deductible by your S Corporation. Make sure you keep copies of the documentation proving your expenses (utility bills, for example).

Jumping through all these hoops may not be easy, but it can result in a huge tax savings! As a bonus, none of this is reported separately on Form 1099 or Schedule E. The rent expense is simply deducted by the S Corporation, and there is no required separate reporting for employee reimbursements.

Bottom line is that taxes are complicated, and you should not take tax advice from the internet! Discuss all this with your tax accountant to see if it applies to you.

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