Should Your Painting Business Rent or Own Its Building?

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If your painting company is paying thousands of dollars in rent every month, maybe it's time you own the building instead.
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With the self-rental tax strategy, your painting company can help you build equity and potentially create a massive upfront tax deduction.
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Here's how it works: a separate company you own buys the building, and your painting company becomes the tenant.
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But there are three questions you need to answer.
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One, how can you buy the building without putting millions of dollars down?
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Two, how does owning it actually create a major tax deduction?
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And three, can you actually use that deduction against the income from your painting business?
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Let's break it down.
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If we haven't met, I'm Daniel Honan.
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I'm a CPA and former painting business owner.
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I've helped over 500 painting businesses from startup to 20 million in revenue, know their numbers, and save big in tax.
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Now, this is not a strategy for someone doing$100,000 a year and struggling to make payroll.
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This gets more interesting when your painting business is profitable, meaning you're paying meaningful tax and you need commercial space anyway.
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Maybe you're renting a warehouse, maybe you've got an office, you've got trucks outside, you've got paint and equipment everywhere.
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And every month you're writing a rent check to somebody else.
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At some point, you should ask, should I own this building instead?
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Let's start with the structure.
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Say you own ABC Painting.
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I normally would not want ABC Painting itself to own the real estate.
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Instead, you might have a separate LLC, ABC Real Estate LLC, and have ABC Real Estate own the building.
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ABC Painting runs the painting business.
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ABC Painting pays the rent to ABC Real Estate.
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So instead of sending$10,000 or$15,000 a month to some landlord, you're sending the rent to a company you own.
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The building company still has the expenses, debt, property taxes, insurance, repairs, maintenance, but you're now building equity instead of paying somebody else's mortgage.
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Now let's talk about the financing.
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One option for owner-occupied commercial real estate is an SBA 504 loan.
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A typical structure can look roughly like this: about 50% bank financing, about 40% through the SBA backed CDC portion, about 10% from you.
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Some deals require more.
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But use 10% for a simple example.
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You buy a$2 million building.
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Instead of writing a$2 million check, you might put down around$200,000.
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Now you've got control of a$2 million asset, and your painting company is helping support the payments through SBA occupancy rules.
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So this doesn't mean you buy a strip mall and stick the painting company in one of the tiny units.
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This is primarily for owner-occupied property, but painters often need space anyway: warehouse space, truck parking, equipment, training, offices, production meetings.
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And so we're taking a cost the business already has and asking whether you should own the asset.
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Now we get to the tax part.
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Commercial buildings normally depreciate slowly.
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Most of the building gets depreciated over 39 years, but you may be able to do a cost segregation study.
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The cost segregation study takes the building apart for tax purposes.
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It identifies parts of the property that qualifies for shorter depreciation lives.
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That can move a lot of depreciation into the earlier years.
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Say you buy a$2 million building.
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After land, you have$1.6 million of depreciable property.
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Maybe a cost segregation study identifies$400,000 that qualifies for accelerated depreciation.
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You could potentially create a very large first-year tax deduction.
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And a lot of people stop right there.
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Buy a building, do the cost seg, get a huge write-off.
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But there's a problem.
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Now, quick pause.
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If you get value from this type of information, grab a free copy of my book, Profitable Painter.
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Click the link in the description to grab a free copy.
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Just cover the shipping.
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Okay.
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So here's the problem: rental real estate is normally passive.
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Let's say your painting company makes$1 million.
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It pays$150,000 in rent.
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Now the painting company shows$850,000.
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The real estate company gets$150,000 of rent.
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But after interest, expenses, and depreciation, maybe the real estate company shows a$350,000 loss.
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Now you might think, perfect,$850,000 of income minus$350,000 of loss.
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I pay tax on$500,000.
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Not necessarily.
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And if you don't have passive income to offset it, the loss may get suspended.
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Now you're paying tax on the painting business income while your big real estate deduction sits there unused.
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And that's where 1.649-4 comes in.
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Some people call this the dash four strategy.
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Under the right circumstances, the tax rules let you group activities together for the passive activity rules.
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Instead of painting business company here, rental property here, you may be able to treat them as one economic activity.
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And that can be huge.
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If you materially participate in the painting business and the activities are properly grouped, the real estate loss may be treated differently.
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Now let's go back to the example$850,000 of painting business income,$350,000 of real estate loss properly grouped.
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You can end up potentially around$500,000 of combined taxable income.
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Instead of$850,000 of active income with a$350,000 passive loss sitting unused, the cost segregation creates the deduction, but the dash four rule can determine whether you can actually use that deduction now.
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And these are the rules.
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Ownership is a big one.
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Say you own 100% of the painting company and 100% of the real estate company.
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That's a cleaner fact pattern here.
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But say you own 80% of the painting company, a partner owns 20%, and you own 100% of the real estate.
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Now the facts are different.
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You can't assume that the same strategy works here.
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That's why you need to plan for this before you go and buy the building.
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Not next April when somebody is preparing the tax return.
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And here's the bigger lesson.
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The wrong way to think about this is I need a write-off.
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Let me buy a$2 million building.
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No, the better question is my business already needs a building.
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I'm financially strong.
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I'm staying in this market.
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Should I keep paying someone else's rent?
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Or should I just own the property?
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Then we stack the tax strategy on top of that.
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You've got leverage, you've got depreciation, you've got the principal paydown, you've got potential appreciation, and you've got an asset outside of the operating painting company.
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That can matter when it comes to sell.
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Maybe one day you sell the painting company, but keep the building.
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Now the buyer of your painting business may become your tenant.
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But think about that exit before you make that election.
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These grouping rules can affect what happens later.
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If your plan is to sell the painting company in 10 years, but keep the real estate, tell your tax advisor now.
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Don't just model the first year deduction.
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Model the exit too.
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So here's the strategy: your painting company needs a building.
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A separate real estate company buys it.
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You may use an SBA 504 loan.
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The painting company rents from the real estate company.
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You perform a cost aggregation study on the real estate, and that may create accelerated depreciation.
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Then you analyze the dash four to see whether the painting business and the real estate activity can be properly grouped.
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If everything works, you may be able to use a large depreciation deduction against your painting business income.
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And while that happens, your company is helping pay for an asset you own.
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And that's the bigger point.
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Don't buy real estate just because you want a tax deduction.
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Buy good real estate when your business actually needs it.
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Then structure it so that you get every tax advantage you're legally entitled to.
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And if your painting business is making enough money that strategies like this are starting to matter, watch my next video on tax strategies for painting business owners making more than$400,000 a year.
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Because once your income gets that high, the basic tax strategies usually aren't enough anymore.