How your entity structure changes what a study is worth

Pass-through entities

Partnerships, LLCs taxed as partnerships and S corporations pass depreciation through to owners, where it meets each owner's own basis, at-risk and passive activity limits. A large allocated loss can stall at any of those three gates before reaching the return.

Owners should check basis before commissioning a study on the expectation of a usable loss.

C corporations

No passive activity limits apply at the corporate level, which removes the biggest obstacle. But the deduction offsets corporate income at the corporate rate, and the cash benefit stays inside the corporation.

For a business that owns the building it operates from, this is often clean and effective. For real estate held for investment, the double-taxation exposure on eventual sale generally outweighs it.

Self-rental

The very common structure: real estate in one entity, operating business in another, rent paid between them.

Under the self-rental rule, net rental income from property rented to a business in which you materially participate is recharacterised as non-passive. Net rental losses are not — they stay passive. That asymmetry is deliberate and it catches people.

A cost segregation study that turns a self-rental from income-producing to loss-producing can therefore convert a currently usable position into a suspended one. A grouping election under Reg. §1.469-4 may help, but it must be made deliberately and it has consequences.

Single-member LLCs and individuals

Simplest case. The activity is reported on Schedule E or C and the passive rules apply directly. Basis and at-risk are rarely the binding constraint; participation usually is.

Trusts

Trusts face the passive rules too, and material participation by a trust is determined by the trustee's participation — an area with limited guidance and real uncertainty. Worth specific advice before building a plan around it.

The practical point

Decide the structure question before the study, not after. We raise it on every feasibility review because the same building genuinely produces different economics depending on how it is held and who reports the result.