Should Your Business Own Its Building? The Tax Side of Buy vs. Lease
Owning the real estate your practice or company uses can build wealth and create large deductions, but only if the structure is set up before you close. Here is how the tax math compares and how owner-users usually set it up.
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You are paying $10,000 a month in rent and wondering whether that money should be building your equity instead. For a stable practice or business, buying the building is often a good long-term move. The tax side decides how much of the benefit you actually keep: which entity holds the building, how the lease is written, and whether the first-year depreciation can reach your income at all.
Lease vs. Own: The Tax Comparison
Same building, two sets of deductions
| Lease | Own | |
|---|---|---|
| Main deduction | Rent, as paid | Depreciation on the building, interest, property tax, insurance, repairs |
| Recovery period | Not applicable | Nonresidential building: 39 years; land is never depreciated |
| Accelerating it | Not available | Cost segregation moves parts of the cost into 5, 7 and 15-year property; qualifying property acquired after January 19, 2025 can be eligible for 100% bonus depreciation |
| Later improvements | Landlord or tenant improvement allowance | Qualifying roofs, HVAC, fire protection, alarm and security systems, and interior improvements can qualify for Section 179 expensing as qualified real property |
| Cash up front | Security deposit | Down payment and closing costs |
| At the exit | Nothing to sell | Gain on sale; depreciation taken on the building can be taxed as unrecaptured Section 1250 gain at up to 25% |
The comparison is not only about deductions. With a lease, every dollar of rent is gone. With ownership, part of each payment builds equity and the property may appreciate, but you take on vacancy risk, repairs and a large, illiquid asset. Our commercial real estate depreciation guide covers the 39-year schedule in detail.
How Owner-Users Usually Structure It
Building in an LLC, business as the tenant
The common setup has three pieces:
- You (and any partners) own the building through an LLC, separate from the operating company.
- The LLC leases the building to your practice or company under a written lease at market rent.
- The business deducts the rent; the LLC reports rental income, depreciation and expenses.
Why not buy it inside the operating company?
- Getting it out later costs tax. A corporation that distributes appreciated property recognizes gain as if it sold it (IRC 311(b)), and S corporations follow that rule through IRC 1371(a).
- Selling the business gets harder. A buyer of your practice may not want the building, or may not be able to finance both.
- Rent is a clean way to move cash. Rentals from real estate are excluded from self-employment income under IRC 1402(a)(1), and rent paid to your LLC is not S corporation wages.
For choosing between an LLC, S corporation and other structures for real estate generally, see our entity selection guide for real estate.
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The Self-Rental Rule Comes With the Building
Profit is nonpassive, a loss stays passive
When you rent property to a business in which you materially participate, an amount equal to the building's net rental income is treated as nonpassive. A net loss is not recharacterized and stays passive. Two consequences matter for a buyer:
- A profitable building cannot absorb passive losses from your other rentals.
- A large first-year loss from a cost segregation study stays passive unless the building is grouped with the business, which generally requires the same proportionate ownership in both and has to be disclosed on the return.
Our full guide to the self-rental rules includes a worked example and a calculator showing where the first-year loss lands, grouped and not grouped.
Scenarios: Medical Practice, Dental Office, Car Wash
Illustrative composites, not real clients
A two-physician medical practice
Two physicians each own 50% of the practice and are buying a $2 million medical office building. Owning it 50/50 in a separate LLC matches their practice ownership, so a grouping election stays available. Medical buildouts tend to carry a lot of specialized plumbing, electrical and finish work, which is why our medical office cost segregation guide treats them as their own category. The planning question is timing: model the study year grouped and ungrouped before closing. Our physician tax practice handles this alongside the practice return.
A solo dental office
A dentist owns 100% of her practice and buys a freestanding office. Sole ownership meets the proportionate ownership test easily. The bigger decision is whether she plans to sell the practice in ten years and keep the building as an income property. If so, holding it in a separate LLC with a market-rate lease is what makes that exit simple. See our tax guide for dentists for the practice side.
A car wash owner
Car wash owners usually own the real estate, and the site is mostly equipment, paving and site work, which makes cost segregation unusually valuable. When the land and building sit in one LLC and the operating company in another, the same self-rental and grouping analysis applies. Our car wash cost segregation guide walks through the depreciation side.
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When Owning Does Not Make Sense
The honest counterweight
- You may move within a few years. Transaction costs on the purchase and the sale can outweigh the equity you build.
- The business needs the cash. A down payment that starves working capital is an expensive way to save on rent.
- You cannot use the deductions. If the building will be leased to your own business and grouping is not available, a large first-year loss may sit suspended for years.
- The space is specialized for you alone. A building that only suits your business can be hard to lease or sell later.
None of these are tax rules; they are the business side of the decision. The tax side works best when it is settled before closing, not at filing.
Frequently Asked Questions
Buying the building your business uses
Is it better for a business to lease or own its building?
Neither wins by default. Leasing keeps cash in the business and the rent is deductible as it is paid. Owning ties up a down payment but builds equity, lets you deduct depreciation and interest instead of rent, and can be paired with cost segregation. Owning tends to fit a stable business that expects to stay in one location for many years.
Should I buy my office building personally or through my company?
Most owner-users hold the building in a separate LLC and lease it to the operating company. A corporation, including an S corporation, that later distributes an appreciated building recognizes gain as if it sold it under IRC 311(b). A separate LLC also lets you sell the business and keep the building. Liability structuring is a question for your attorney.
Is rent I pay to my own LLC deductible?
Yes, if it is a real, market-rate rent for property the business uses. IRC 162(a)(3) allows a deduction for rentals required as a condition of continued use of property for the business. On the other side, the self-rental rule treats the LLC's net rental income as nonpassive when you materially participate in the business.
Can I do cost segregation on a building my business uses?
Yes. The building is depreciable whether you lease it to your own business or not, and a cost segregation study can move part of the cost into shorter-life property. The catch is the self-rental rule: a first-year loss on a building leased to your own business stays passive unless the building is grouped with the business. Decide that before ordering the study.
What happens to the building when I sell my practice?
If the building sits in a separate LLC, you can keep it and lease it to the buyer, sell it to the buyer, or sell it to someone else. If you keep it and stop working in the business, the rent is no longer self-rental income; it becomes ordinary rental income, which is passive by default.
Buying the Building Your Business Uses?
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Authoritative Sources
- 26 U.S.C. § 162(a)(3), Rentals as a business expense
- 26 U.S.C. § 168, Accelerated cost recovery system (39-year nonresidential property; bonus depreciation)
- 26 U.S.C. § 179(e), Qualified real property
- 26 U.S.C. § 311(b), Gain on distributions of appreciated property
- 26 U.S.C. § 1(h)(6), Unrecaptured section 1250 gain
- 26 CFR § 1.469-2(f)(6), Property rented to a nonpassive activity
- IRS Publication 946, How To Depreciate Property
Citations reflect U.S. federal tax law as of the article's last reviewed date.