Generally when you are renting out property, be it real estate or something else such as construction equipment, you are required to depreciate that property on SCH E. However, you can't depreciate that which you did not pay for and therefore do not own. That's because *YOU* don't have a cost basis for the property that *YOU* paid, to take any depreciation from.
In your case since you are basically sub-letting, it's really your business that is sub-letting - not you. Neither you nor your business actually owns the property. Therefore you don't report it on SCH E. It gets reporting as other business income on the SCH C.
The actual owner of the property is already depreciating it. So *you* can't.
Now since rental income is passive, you'd "think" it would be a schedule E item. But it's not because your business is renting the "entire" building for an "active" (not passive) business. Therefore all income received by the business is active and reported on SCH C.
I see this stuff all the time and while it's been years since I've been asked to "cite" anything concerning it and did so years ago, I'm not willing to take the time to find it again. But it's a fact that this is the correct way to do it.
