Renting a House For Business Purposes
Renting a house for business purposes requires the landlord to determine if the rental activity is deemed a business or an investment for tax purposes.3 min read
Updated November 2, 2020:
Renting a house for business purposes requires the landlord to determine if the rental activity is deemed a business or an investment for tax purposes. The classifications have significant tax implications.
A business owner who conducts business at a home can receive important tax deductions, including home office, startup, and Section 179 expensing. An owner's rental will only qualify as a business if it is a regular and continuous form of work that garners a profit. You can hire staff, such as a manager, to meet this qualification. You don't have to own a minimum amount of property units to qualify as a business.
Rental Business and Investment Case Studies
You can find an example of owning a rental property as a business in Curphey v. Commissioner., 73 T.C. 766 (1980). Dermatologist Edwin Curphey owned six rental properties in Hawaii. He used a room in his home as an office to manage his real estate holdings. Curphey was able to prove to the court that he personally managed the properties. This included soliciting new tenants, furnishing supplies, cleaning, and preparing for new tenants.
You can also be legally considered a business if you hire a manager. In Gilford v. Commissioner, 201 F.2d 735 (2d Cir. 1953), Gilford and relatives jointly owned eight Manhattan apartment buildings. To manage the properties properly, the family hired a real estate agent. The agent then shared the net income profits with the family members. The court determined that although Gilford spent a small amount of time managing the building, she was indeed a business. The court saw that ownership and management of the buildings were under Gilford's control through the actions of her real estate agent.
However, the courts can also determine rental property ownership to be an investment. In Anderson v. Commissioner, T.C. Memo 1982-576, the IRS and the tax court determined Anderson was an investor, not a business owner. This determination was made because although Anderson rented a farm, Anderson only paid bills related to the farm, deposited rent checks, and kept records on the farm. The court saw these as insufficient to be considered regular, continuous, or systematic enough to be classified as a business.
Renting Your Home to Your Business
A little-known IRS rule says you can rent your personal home for fewer than 15 days per year without having to claim the income made on your taxes. As with any IRS stipulation, there are specific rules you must follow. They include:
- The home cannot be rented for fewer than 15 days per year.
- If you rent 15 days or more, you lose the tax break.
- The home must be rented at a fair rate that is market value.
- Form 1099 must be issued from yourself to your company with the total rent paid.
- Form 1099 must be filed as part of your personal taxes.
- If a board meeting takes place in the home, you must record the meeting minutes.
Entrepreneurs can use this option to avoid expensive meeting locations that require catering. By holding year-end board meetings at your home, you can offset these costs. You can write off the catering and purchases needed to host the meeting at your home on your tax return.
Renting an Apartment for Business Purposes
For some, a small apartment might suit the needs of your small business. Before renting an apartment and signing a lease, you should take several steps:
- Check the building's zoning. A residential-only zoning might cause issues, whereas a location listed as mixed-use allows for both residential and commercial tenants in the same building.
- Consider the look and location of the building if clients, vendors, or business contacts will be visiting it.
- Verify the management company understands you will be operating a business to confirm that is allowed.
- View the apartment in person to confirm it meets all spacing and business needs.
- Complete and sign the lease agreement.
If you need help renting a house for business purposes, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.