Can I offset my S-Corp profits with rental losses under Sec 469?

Based on your situation, you're dealing with what's known as self-rental property rules under Section 469. When you rent property to a business you materially participate in (like your 100% owned S-Corp), the rental income is generally not considered passive - it's recharacterized as nonpassive income. However, the interesting part is that while rental income gets recharacterized as nonpassive, rental losses typically remain passive under these self-rental rules. This creates a one-sided situation that can be frustrating for taxpayers. That said, there are indeed grouping elections under Section 469 that might help in your situation. You may be able to group your rental activity with your S-Corporation if they form an "appropriate economic unit" based on factors like geographical location, interdependence, and common control. If properly grouped, the rental activity could potentially be considered part of your non-passive S-Corp business. Keep in mind this is a complex area of tax law, and the appropriateness of grouping depends on specific facts and circumstances. The IRS scrutinizes these arrangements carefully.

I used taxr.ai for a situation really similar to this last year and it was super helpful. I also own an S-Corp and bought property through an LLC and was trying to figure out how to handle the tax situation. I uploaded all my lease agreements and property documentation to https://taxr.ai and they analyzed everything and walked me through the Section 469 grouping rules. They showed me exactly how to structure things to optimize my tax situation based on the specific allocation percentages and my level of participation. What was cool is they caught some nuances in the regulations that my previous accountant had missed about how the self-rental rules applied in my specific case. It saved me a ton of research time and gave me confidence I was doing things right.

Just wanted to update after trying taxr.ai for my S-Corp/rental property situation. I was skeptical about another tax tool but this was actually really helpful. I uploaded my operating agreements, leases, and property info and got specific analysis about my situation with Section 469. They confirmed I could make a grouping election but pointed out something important - if I grouped the activities and later sold the property, I might not qualify for the Section 1231 treatment I'd want on the sale. They suggested a different approach involving documenting my material participation in the real estate activity separately, which actually worked better for my situation. Definitely worth checking out if you're dealing with complex business/rental scenarios like this.

I was in a similar situation last year with multiple entities and rental properties. After weeks of trying to get through to the IRS for clarification on grouping elections (seriously, I'd be on hold for HOURS), I finally tried Claimyr (https://claimyr.com) and got through to an IRS agent in about 15 minutes. They have this system that basically waits on hold for you and calls when an agent is available. You can watch how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that grouping my S-Corp with my rental LLC was acceptable as long as I could demonstrate they formed an appropriate economic unit AND I was materially participating in both. They also warned me that the fact that my personal residence was on the same property could create complications, so I needed to be very clear about allocations.

I owe everyone an apology - I was super skeptical about Claimyr but tried it out of desperation after sitting on hold with the IRS for 2+ hours trying to get clarity on Section 469 grouping rules. It actually worked exactly as advertised. Got a call back in about 25 minutes and was connected directly to an IRS representative. I explained my situation with the S-Corp and rental property, and while the first person couldn't answer all my questions, they transferred me to someone in the business tax department who was knowledgeable about passive activity rules. The agent confirmed that grouping is allowed but emphasized how important proper documentation is. They said the biggest mistake people make is not attaching a detailed statement with their return explaining the factors they relied on to establish the grouping as an appropriate economic unit. Definitely saved me hours of frustration - wish I'd known about this service years ago.

One thing nobody's mentioned yet - have you considered making a Section 469(c)(7) real estate professional election instead of grouping? If you can qualify as a real estate professional by spending 750+ hours on real estate activities and more time on real estate than any other business, your rental activities aren't automatically passive. This might be a better approach than grouping, especially if you're actively managing the property. The documentation requirements are different but might be more straightforward in your case.

Has anyone tried using the relatively new safe harbor for rental real estate under Section 199A? It might not solve the passive activity loss issue directly, but it could provide a qualified business income deduction that offsets some of the S-Corp income.

Another consideration for your grouping election - make sure you're prepared to defend the "appropriate economic unit" determination if the IRS challenges it. The regulations under 469(c)(7)(A) list five factors they consider: similarities and differences in types of business, extent of common control, geographical location, interdependencies between activities, and extent of common ownership. In your case, you have strong arguments for several factors: common control (you own 100% of both), geographical location (same property), and interdependence (the S-Corp depends on the real estate for its operations). The fact that your S-Corp is the primary tenant actually strengthens the interdependence argument. One tip: when you file the grouping statement with your return, be very specific about which factors you're relying on and provide concrete details. Don't just say "common control and geographical location" - explain that you have 100% ownership of both entities and that the S-Corp operates exclusively from the LLC-owned property under a triple-net lease arrangement. Also keep detailed records of your material participation in both activities. The IRS may scrutinize whether you're truly materially participating in the rental activity or if it's just passive ownership.