Yes, you can charge your business rent for your home office, but only if the business is a legally separate entity from you: an S-corporation, C-corporation, or a multi-member LLC taxed as a partnership or corporation. The business deducts the rent as an ordinary expense and you report it as rental income. A sole proprietorship or a single-member LLC treated as a disregarded entity cannot use this strategy, because the IRS treats you and the business as the same taxpayer and ignores any “rent” that moves between you.
Which Businesses Can Actually Pay You Rent
The IRS treats a single-member LLC as a disregarded entity unless the LLC files Form 8832 to elect corporate taxation.1Internal Revenue Service. Single Member Limited Liability Companies Sole proprietorships get the same treatment. You cannot contract with yourself, so a rent payment from a disregarded business to its owner produces no tax effect. The IRS will treat it as a personal draw.
S-corporations, C-corporations, and multi-member LLCs taxed as partnerships or corporations are separate legal persons. That separation lets the entity sign a lease with you, the property owner, the same way it would with any unrelated landlord.2Internal Revenue Service. Limited Liability Company (LLC) If your business is currently a single-member LLC, you can elect S-corporation tax treatment by filing Form 2553, but that election brings payroll and compliance obligations that are worth reviewing with a tax professional before you commit.
The Accountable Plan Alternative
Before you draft a lease, look at whether an accountable plan reimbursement would serve you better. An S-corporation can reimburse a shareholder-employee for the business-use share of actual home expenses: mortgage interest, property taxes, utilities, insurance, and repairs. The corporation deducts the reimbursements. You do not report them as income. Neither side pays additional tax on those amounts.
The plan has to require you to substantiate every expense with receipts, return any excess reimbursement, and have a business connection for each cost. Because there is no rental income to report and no depreciation on the home office, the accountable plan sidesteps both the self-rental recharacterization rule and the depreciation recapture problem described later. For many small S-corporation owners it is the cleaner option.
What the Space Itself Has to Be
Internal Revenue Code Section 280A sets the standards. The core rule is exclusive use: the portion of the home you rent to the business has to be used only for business activities, with no personal overlap.3Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. A spare bedroom that doubles as guest quarters does not qualify. A dining table where the family eats does not qualify. The area needs to be clearly identifiable: a dedicated room, or a permanently partitioned section of one.
The space also has to be your principal place of business. Under Section 280A that includes any location where you handle the administrative side of the business (billing, scheduling, correspondence) as long as no other fixed location is where you do those things. If the company also leases a commercial office where you regularly perform administrative tasks, the home office may not clear this bar. A log of the hours you work in the space, plus dated photos showing the room configured for business, will strengthen your position if the arrangement is ever questioned.
Setting a Rent Number That Will Hold Up
Rent has to reflect what an unrelated tenant would pay for a comparable space. Inflated numbers draw scrutiny and can trigger disallowance and penalties. Two methods work.
Pro-Rata Cost Method
Measure the office square footage and divide it by the total square footage of the home. Apply that percentage to your actual housing costs: mortgage payment or rent, property taxes, homeowners insurance, and utilities. An office of 200 square feet in a 2,000-square-foot home gives you 10 percent as the baseline. This ties directly to verifiable expenses.
Comparable Market Method
Pull local listings for small office suites and use those per-square-foot rates as your benchmark. Save the listings themselves: addresses, square footage, monthly rent. If offices in your area rent for roughly $15 per square foot per year and you charge $40, the IRS has clear grounds to reduce the deduction.
Decide up front whether the lease will be a gross lease, with one flat payment covering everything, or a lease where the business pays some costs separately. A gross lease is simpler for a home office because the business writes one check and you handle property expenses personally. If you split out taxes, insurance, or utilities, the base rent has to come down to reflect that, and each side payment needs its own paper trail.
Putting the Lease on Paper
A written lease is not optional. Without one, the IRS can treat the payments as informal transfers with no business purpose. The document should cover:
- The parties: your legal name as landlord, the corporation’s legal name as tenant.
- The premises: a description of the rented space, including square footage and location within the home.
- The rent amount, with the fair market value work supporting it.
- The term: start and end dates, plus any renewal provisions.
- A payment schedule, with monthly billing the standard and a specified payment method.
- Responsibilities for maintenance, insurance, and repairs.
Sign it in both capacities, once as owner and once as corporate officer, and date it before rent payments begin. File the executed lease with your corporate records. Pay rent by check or electronic transfer from the business account so every payment is traceable. Cash payments with no paper trail undermine the whole arrangement.
How the Income Gets Taxed
The business records rent payments as an ordinary business expense, reducing the corporation’s taxable income. If total payments to you reach or exceed $600 in a calendar year, the business has to issue you Form 1099-MISC by January 31 of the following year.4Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information Late filing triggers per-form penalties that climb the longer you wait, reaching $340 per form if filed after August 1 and $680 per form for intentional disregard.5Internal Revenue Service. Information Return Penalties
On your personal return, the rental income goes on Schedule E of Form 1040.6Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss Schedule E lets you deduct the pro-rata share of expenses tied to the rented space: mortgage interest, property taxes, insurance, repairs, and depreciation. The business-use portion of the home is depreciated over 27.5 years using the straight-line method, the same recovery period that applies to any residential rental property.7Internal Revenue Service. Depreciation and Recapture 4
The Self-Rental Rule
Here is the twist most owners miss. Under Treasury Regulation 1.469-2(f)(6), when you rent property to a business in which you materially participate, the net rental income is automatically recharacterized as nonpassive.8eCFR. 26 CFR 1.469-2 – Passive Activity Loss You cannot use that income to soak up passive losses from other investments.
The recharacterization only applies to net income, not to net losses. If your home office rental expenses exceed the rent the business pays, the loss is still passive.9Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules The outcome is asymmetric: profits get taxed at ordinary rates as nonpassive, while losses give you limited benefit. Factor this into your choice between a formal lease and an accountable plan.
Qualified Business Income Deduction
Rental income from a self-rental may qualify for the 20 percent Qualified Business Income deduction under Section 199A. Even a rental activity that does not independently rise to the level of a trade or business qualifies for the QBI deduction when the property is licensed or rented to a commonly controlled business.10Internal Revenue Service. Qualified Business Income Deduction Section 199A was originally scheduled to expire after December 31, 2025, but was made permanent by legislation signed in mid-2025. Income thresholds can limit or eliminate the deduction for higher earners, so confirm the specifics with a tax professional.
The 14-Day Augusta Rule
Section 280A(g) offers a narrower alternative. If you rent your home (or a portion of it) for fewer than 15 days during the tax year, you do not report any of the rental income.3Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. The business still deducts the rent. You receive the money tax-free. This is often called the Augusta Rule, after homeowners near the Masters tournament who rented their homes for the event without reporting the income.
The trade-off: no depreciation, no pro-rata mortgage interest beyond what you already claim on Schedule A, and no utility deductions for those days. This works best when the business legitimately needs the space only a handful of times a year, such as a corporation holding quarterly board meetings or an annual planning retreat at the owner’s home. The daily rent still has to reflect fair market value, and each use needs documentation: agendas, sign-in sheets, or minutes showing a genuine business purpose.
The Cost You Will Pay When You Sell
Claiming depreciation on your home office creates a tax consequence that shows up years later. Section 121 normally lets you exclude up to $250,000 of capital gain on the sale of a primary residence ($500,000 if married filing jointly). You cannot exclude the portion of the gain equal to the depreciation you claimed, or were allowed to claim, on the business-use portion of the home.11Internal Revenue Service. Sale of Residence – Real Estate Tax Tips
That recaptured depreciation is taxed as unrecaptured Section 1250 gain at a maximum rate of 25 percent, higher than the long-term capital gains rate most homeowners pay.12Internal Revenue Service. Topic No. 409, Capital Gains and Losses Claim $30,000 in depreciation over the years you rent the office to your business, and that $30,000 gets taxed at up to 25 percent when you sell, even if the rest of your gain falls under Section 121. Recapture applies whether you actually took the deduction or simply could have. This is one reason many owners of small S-corporations use an accountable plan instead.
Insurance and Local Permits
Standard homeowners policies typically exclude or sharply limit coverage for business activities in the home.13National Association of Insurance Commissioners. Renting Out Your Home? You Need Insurance Coverage for Home-Sharing Rentals If a client is injured in your home office or business equipment burns in a fire, your personal policy may deny the claim. Talk to your insurer before signing the lease about a home business endorsement or a separate business owner’s policy. Some carriers offer a landlord policy rider that covers the rented portion of the home for liability, property damage, and lost rental income.
Many municipalities also require a home occupation permit before you can operate a business from a residential property. Common restrictions cover signage, the number of on-site employees, daily client or customer visits, and outdoor storage of business materials. Permit fees vary widely. Check with your city or county planning department before signing the lease to avoid fines or a forced shutdown.
Keeping the IRS from Calling It Wages
The biggest risk in a self-rental is the IRS deciding the “rent” is really disguised compensation or a distribution. Recharacterization as wages means you and the corporation owe back payroll taxes (Social Security, Medicare, and federal unemployment), plus interest and penalties. To lower that risk:
- Pay yourself a reasonable salary first. An S-corporation shareholder-employee who takes below-market wages and inflated rent invites scrutiny. Your W-2 compensation should reflect what someone in your role would earn.
- Keep rent at fair market value. Overcharging relative to comparable office space is the clearest red flag.
- Maintain separate bank accounts. Rent should move from the business account to your personal account, not shuffle through commingled funds.
- Document everything. A signed lease, fair market value analysis, 1099-MISC filings, and consistent monthly payments create the paper trail that distinguishes a legitimate expense from an informal transfer.
The IRS looks at the substance of the transaction, not just the paperwork. An arms-length rental at market rates between a property owner and a separately operated corporation will hold up. An owner funneling corporate profits through a lease to dodge payroll taxes will not.