Tax benefits when one LLC rents property from another LLC with same owner - legal structure question

This structure is actually quite common and can provide legitimate benefits when done correctly. When you have two separate LLCs with the same owner (often called "brother-sister" entities), there are several potential advantages to consider. First, there's the liability protection you mentioned. By keeping the real estate separate from the operating business, you're creating a firewall between assets. If someone sues your car rental business, they generally can't go after the real estate owned by the separate LLC. Tax-wise, there can be benefits too. The operating LLC (car rental) can deduct legitimate business expenses like parking fees. The parking lot LLC receives that income and can deduct its own expenses like mortgage interest, property taxes, insurance, and depreciation. However, you need to be very careful with a few things: First, make sure the rent charged is at market rate. The IRS looks closely at related-party transactions, and artificially high rents might be recharacterized as disguised distributions. Second, maintain proper documentation and separation between the entities (separate bank accounts, proper leases, etc.). Also, consider self-rental rules - if you actively participate in the operating business, the rental income might be subject to self-employment tax depending on your structure. I'd recommend working with both a business attorney and CPA who specialize in small business structures to set this up properly.

I actually used taxr.ai to figure out this exact scenario last year! I was trying to decide whether to set up two separate LLCs (one for my rental properties and one for my consulting business) or just have one entity for everything. After going back and forth for weeks, I finally uploaded my incorporation docs and business plan to https://taxr.ai and got a detailed analysis showing the pros and cons of each approach. For my situation, they confirmed that having separate LLCs made sense from both a liability and tax perspective. The AI analyzed the specific rental arrangements I was considering and flagged potential issues I hadn't even thought about with self-rental rules and passive activity limitations. The most helpful part was that they outlined exactly how to document everything properly to avoid raising red flags with the IRS. They even generated a sample rental agreement between my two LLCs that specified fair market value terms.

I tried taxr.ai after seeing the recommendation here, and wow - wish I'd known about this sooner! I uploaded my existing LLC documents and a draft of a lease agreement between my two companies (photography studio and equipment rental). The analysis pointed out several problems with how I had structured things. Turns out I was charging too little for equipment rentals between my businesses, which could have triggered related party transaction issues. They also identified that my operating agreement didn't have strong enough language about entity separation, which could have compromised my liability protection. I especially appreciated their explanation about the "step transaction doctrine" where the IRS might collapse related transactions if they appear to lack business purpose. They helped me document legitimate business reasons for my two-entity structure beyond just tax savings. My accountant was impressed with the level of detail in their reports. Honestly saved me thousands in potential tax issues!

If you're considering a two-LLC structure like this, one of the biggest challenges you'll face is actually getting through to the IRS if you have questions or issues. I spent MONTHS trying to get clarity on some related party transaction rules last year when setting up something similar. After dozens of failed attempts to reach someone at the IRS (endless holds, disconnections, etc.), I discovered https://claimyr.com through a business forum. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS phone queue and call you when an agent is about to answer. I was pretty skeptical, but I was desperate after waiting on hold for 3+ hours multiple times. Using their service, I got through to an IRS business entity specialist who answered my specific questions about related-party rentals between LLCs with common ownership. The agent confirmed that my structure was compliant as long as I maintained proper documentation and charged fair market rates. Getting that direct confirmation from the IRS gave me the confidence to move forward with my business structure.

I was one of the biggest skeptics about Claimyr when I first heard about it. I was convinced it was either a scam or wouldn't work as advertised. But after my fifth failed attempt to reach the IRS about my multi-LLC structure issues, I finally gave in and tried it. I'm honestly shocked at how well it worked. I got connected to an IRS business specialist within about 45 minutes (versus the 3+ hours I had spent on previous attempts, often getting disconnected). The agent was actually really helpful about my specific situation with two LLCs doing business with each other. The most valuable piece of information I got was confirmation about what documentation I needed to maintain for related-party transactions. The agent explained that I needed to keep records showing how I determined fair market value for the rents between my entities. This alone saved me potential headaches during any future audit. For anyone dealing with complex business structures involving multiple related entities, being able to actually speak with the IRS directly is absolutely worth it.

One thing nobody has mentioned yet is the potential issue with state taxes and fees. Depending on your state, having multiple LLCs can get expensive FAST. In California, for example, each LLC has an $800 annual tax regardless of whether it makes any money. Also consider that some states might have specific rules about related-party transactions that are more strict than federal regulations. New York, for example, has some particular quirks around this. Another consideration: have you thought about a Series LLC instead? Some states allow them, and they essentially let you create separate protected "cells" within a single LLC. Might accomplish what you want with less administrative overhead.

Don't overlook self-rental rules! If you materially participate in the car rental business, then rent property to it through your other LLC, the rental income isn't considered passive. This means you can't use rental losses to offset other passive income. IRC Section 469(c)(7) and related regulations cover this. The rental income gets recharacterized as nonpassive, while expenses remain passive. It's a weird hybrid that often surprises people who set up these structures. Also, if the rental LLC has net income and you materially participate in the operating LLC, you might face Net Investment Income Tax on that rental income.

This is a really comprehensive discussion! As someone who's been considering a similar structure, I'm curious about the practical day-to-day operations. How do you actually handle the paperwork and bookkeeping when you're essentially paying yourself rent between your own entities? For example, do you need to issue invoices from the parking lot LLC to the car rental LLC? How detailed do those invoices need to be? And what about things like late fees if the rental LLC is short on cash flow one month - can you waive those without creating issues with the IRS? I'm also wondering about banking logistics. I assume you need completely separate bank accounts for each LLC, but how do you handle situations where you need to move money between them for legitimate business purposes? Are there specific documentation requirements for those transfers? The liability protection aspect is really appealing, but I want to make sure I understand the administrative burden before diving in. It sounds like the benefits could be significant, but only if you're meticulous about maintaining proper separation between the entities.

One aspect that hasn't been fully addressed is the importance of documenting your fair market value determination upfront. When I set up a similar structure for my consulting business and property management LLC, I spent time researching comparable rental rates in my area and created a detailed analysis showing how I arrived at the rental amount. I actually got quotes from three different commercial real estate agents for similar parking spaces in my area, then used the median as my baseline. This documentation proved invaluable when my CPA reviewed the structure during tax prep - having that third-party validation of fair market rates gives you much stronger footing if the IRS ever questions the arrangement. Another practical tip: consider building in an annual rent review mechanism, just like commercial leases often have. This shows the arrangement is truly arm's length and responsive to market conditions. I increase my rent by 3% annually based on local CPI adjustments, which keeps it reasonable while demonstrating the economic reality of the landlord-tenant relationship. The key is treating the arrangement exactly like you would if these were truly unrelated parties. The more it looks and feels like a genuine business relationship, the stronger your position becomes from both a tax and liability protection standpoint.

This is such a valuable discussion! I've been researching similar structures for my own business ventures and this thread has answered questions I didn't even know I should be asking. One thing I'd add from my research is the importance of considering your state's charging order protection laws. Some states provide stronger protection for LLC assets than others when it comes to personal creditors trying to reach business assets. This can be particularly relevant when you have multiple LLCs with common ownership. Also, for anyone considering this structure, don't forget about the potential impact on your business insurance. You'll likely need separate policies for each LLC, and you should make sure your liability coverage properly reflects the interconnected nature of your businesses. Some insurers offer umbrella policies that can cover related entities, which might be more cost-effective than completely separate coverage. The documentation requirements everyone has mentioned are absolutely critical. I've been keeping a "structure compliance checklist" that includes things like: separate board resolutions (even as a single member), documented fair market value analyses, proper invoicing between entities, and annual reviews of rental rates. It sounds like overkill, but if you ever face an audit or liability claim, having that paper trail could be the difference between success and disaster. Thanks to everyone who shared their real-world experiences - this is exactly the kind of practical insight that's hard to find elsewhere!

This thread has been incredibly insightful! As someone who's been considering a similar multi-LLC structure for my upcoming business ventures, I wanted to add a perspective on the IRS audit risk that several people have touched on. From what I've researched, the key factor that seems to trigger IRS scrutiny isn't the existence of related-party transactions themselves, but rather transactions that don't reflect economic reality. The IRS is primarily looking for situations where taxpayers are manipulating income or deductions through artificial arrangements. What gives me confidence about this structure is that it creates genuine economic separation and serves legitimate business purposes beyond tax planning. The liability protection alone justifies the complexity, and the fact that both entities are conducting real business activities with real expenses makes the arrangement substantive. I'm particularly interested in the Series LLC option that @Yuki Tanaka mentioned. For someone just starting out like myself, the reduced administrative burden could make this more feasible while still achieving similar liability protection goals. Has anyone here actually implemented a Series LLC for this type of arrangement? I'd love to hear about real-world experiences with that structure. The documentation requirements everyone has outlined are extensive but seem very manageable if you build good habits from day one. Better to be overprepared than face issues down the road. Thanks to everyone who shared their practical experiences - this discussion has been more valuable than any article I've read on the topic!