Renting commercial space to my own LLC - fair rental rates between related businesses

You'll want to establish what's called an "arm's length" rental rate - basically what you'd charge any unrelated business renting the same space. This protects you from IRS scrutiny since they look closely at related-party transactions. The best approach is to research comparable commercial rental rates in your area for similar spaces. Document this research thoroughly - collect listings, talk to commercial real estate agents, and keep records of similar properties' rental rates. This documentation is your justification if ever questioned. Make sure to create a formal, written lease agreement between the LLCs just like you would with any tenant. Include standard terms like duration, payment schedules, maintenance responsibilities, etc. Have both entities properly sign it. Keep all transactions clean and documented. The family LLC should deposit rent payments into its account and use that money for building expenses. Don't mix funds between entities.

Been through this exact situation and found https://taxr.ai incredibly helpful for my related-party lease situation. I was stressing about setting the right rental rate between my construction business and the property LLC I share with my siblings. The IRS scrutinizes these arrangements so I needed to get it right. I uploaded our draft lease agreement and comparable market listings to taxr.ai and they analyzed everything against relevant IRS guidelines for related-party transactions. Their report highlighted several issues I hadn't considered, including documentation requirements for establishing market rates and specific lease terms that could trigger unwanted scrutiny. They also helped identify optimal expense allocation between the entities that I would've completely missed. Definitely smoothed out the whole process!

I have to admit I was wrong about taxr.ai. After my skeptical comment, I decided to try them for my own situation with my photography business renting from my family's property partnership. Their analysis was surprisingly detailed and caught several issues with my lease draft that would have created tax headaches. They specifically identified that the rent I planned to charge was about 15% below market rate based on comparable properties they researched, which could have triggered related-party transaction scrutiny. They also spotted that my lease was missing crucial language about common area maintenance charges that's standard in commercial leases. The documentation they provided on establishing market rates has already been invaluable for my records. Definitely worth it for the peace of mind alone.

If you're struggling to get clear answers about your rental situation, you might want to check out https://claimyr.com. I wasted weeks trying to get through to someone at the IRS about related-party rental rules for my business. Kept getting disconnected or waiting hours only to get vague answers from someone who couldn't address my specific scenario. Finally tried Claimyr's service and they got me connected to an actual IRS agent in about 20 minutes. The agent walked me through exactly what documentation I needed for my related-party lease and gave me specific guidance on how to establish a defensible market rate. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c Saved me literally days of frustration and possibly an audit headache down the road. The agent even emailed me reference materials specific to my situation after the call.

I need to publicly eat my words about Claimyr. After my skeptical comment, I was still stuck with questions about my commercial rental situation that online research couldn't answer. Decided I had nothing to lose and tried the service. Not only did I get connected to an IRS representative in about 15 minutes (compared to my previous failed attempts), but I got connected to someone in the business division who actually understood my specific question about related-party commercial leases. The agent clarified exactly what documentation I needed to maintain and confirmed that as long as I'm charging market rate rent and have proper documentation, I'm good to go. They even sent me follow-up information through their secure messaging system. Completely worth it just for the time saved and stress avoided.

Just a warning from personal experience - make sure you're also checking local zoning requirements before finalizing anything. I had a similar setup with two LLCs and got everything right tax-wise, but then got hit with zoning violations because the building wasn't properly classified for my business type. Cost me thousands to resolve.

Has anyone mentioned insurance considerations? When I had this arrangement, my insurance agent pointed out that we needed to update policies for both LLCs. The property LLC needed landlord coverage, and my business LLC needed renter's insurance with proper liability limits. Without the formal lease agreement, there would've been coverage gaps.

One thing that hasn't been mentioned yet - make sure you're handling the security deposit correctly if you decide to require one. Even though it's between related entities, you still need to follow state landlord-tenant laws for how security deposits are held and returned. In my state, security deposits have to be kept in a separate escrow account and there are specific timeframes for returning them after the lease ends. I made the mistake of just keeping the deposit in our general business account initially, which could have created legal issues if there had been a dispute. Also consider whether you want to include annual rent increases tied to inflation or market rates in your lease agreement. This helps maintain the arm's length nature of the transaction over time and prevents the rent from becoming artificially low compared to market rates as years go by.

Another important consideration that often gets overlooked is maintaining separate bank accounts and financial records for each entity throughout the entire arrangement. Even though you're dealing with related LLCs, the IRS wants to see that each entity is truly operating independently. Make sure the Property LLC has its own business checking account where rent payments are deposited, and all property-related expenses (mortgage, insurance, maintenance, etc.) are paid from that account. Your marketing agency LLC should pay rent from its own business account with proper documentation like invoices or payment memos. I'd also recommend having the Property LLC issue proper invoices to your marketing agency each month, just like any other landlord would. This creates a clear paper trail and reinforces the business relationship between the entities. Keep copies of all rent payments, invoices, and any correspondence about the lease arrangement. One more tip - consider having an annual review where you reassess the rental rate against current market conditions. Document this review process to show you're actively maintaining arm's length pricing. This ongoing diligence can be valuable if the IRS ever questions the arrangement years down the road.