Can I rent a home to my business?

[brchiz]

I own a real estate business with multiple offices around the state where I live. My wife and I just purchased a rental property using a 1031 exchange near one of our offices about three hours from our primary home. Since I spend about 50% of my time in that office, can our business (S Corp) rent the home from us to stay in while working at that office? I would be staying in a hotel otherwise. I just want to make sure I am following the proper rules to maintain the like-kind exchange status of the 1031.

[M-MTax]

You can but you'll want to stay within the safe harbor:

(2) Replacement property. A dwelling unit that a taxpayer intends to be replacement property in a § 1031 exchange qualifies as property held for productive use in a trade or business or for investment if: (a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the “qualifying use period”); and (b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange, (i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and (ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

There's the self rental rule which means the net income from the rental is not passive income because you materially participate in the business that is renting real estate you own. 

[brchiz]

Thank you for the feedback, just to make sure I understand correctly...

Since we will keep the property, as a rental, for more than 24 months, and it will be rented to our business full-time, it sounds like we will stay within the safe harbor.

To make sure I understand the self-rental rule, if we rent it to the company for $3000 per month, and our monthly expense is $2200, there would be an $800 per month income that would be considered active/ordinary income since we materially participate in the business we rented the property to?

[M-MTax]

That's right......that $800 would be active income......not passive.....so you can't other passive losses you might have to offset the $800.

[Mike9241]

it appears that the rental property will be used for housing rather than in the business.  this may violate the 1031 exchange rules per REG-117589-18

II. Section 1031 after the TCJA
As amended by the TCJA, section 1031(a) provides that no gain or loss is
recognized on the exchange of real property held for productive use in a trade or
business or for investment (relinquished real property) if the relinquished real property is
exchanged solely for real property of a like kind that is to be held either for productive
use in a trade or business or for investment.

it seems you said you would be staying in this property while working at one of your offices.  to me it sounds more like a second home than investment or business property.  

maybe others will look at this differently. 

[brchiz1]

Thank you for your feedback. This would be considered corporate housing and used by other employees as well when traveling to the offices in that region (there are 2 offices within 20 minutes of this home).

If the company can write-off hotel expenses or renting corporate housing from an unrelated party, why couldn't they rent this home for that use?

[Mike9241]

perhaps the best recommendation is to discuss with a tax pro where the property is located. 

one issue is would rent be paid for days unoccupied?   staying at a hotel you only pay for days occupied.  days not used might be considered personal days and that could result in the unit being treated as a second residence, 

you could go over all your plans for the use of the property.