Can I use rental income to fund solo 401k? SEP-IRA?

7 Replies

I love maxing out our tax-advantaged accounts (my 401k at work and Roth IRAs for my wife and myself).  

Usually we have a few thousand dollars each year to invest after we max out these accounts (and it usually just goes into a taxable brokerage account where we use it to buy Berkshire Hathaway or Markel or some other stock that does not pay a dividend).

That extra money was actually how we ended up buying this duplex - thought it might be a good way to diversify our investments.

I was wondering if I could use net income from our duplex (assuming we have net income, and by net income I mean what we report to the IRS) to fund a solo 401k or some other kind of tax-advantaged plan?

I understand that these plans are for self-employed individuals or those running a side business of some kind.  Does running a rental property qualify as "self-employment"?

Note: I am not interested at all in using a retirement plan to BUY more properties...just to put money into it a tax-advantaged way and then using that money to buy stocks/ETFs.

Thanks!

@John Doyle  

No.

Passive income is taxed at a lower rate.

It does not qualify for use making 401k or SEP IRA contributions, nor would it make sense to change it from passive income to higher taxed earned income that would qualify to be used as plan contributions.

Medium safeguard rgb stackedBrian Eastman, Safeguard Advisors | [email protected] | 855‑997‑2298 | http://www.ira123.com

My understanding is that whatever "net income" I have from my rental is taxed at whatever income tax bracket my wife and I are in.

My wife and I file jointly and our taxable income puts us in the 25% bracket, so my understanding is that if we make say $4000 net income from our duplex then we pay $1000 in fed taxes on that.

Are you saying that is incorrect?

Thanks!

What rate is passive income taxed at?

I see the IRS regs about rental activities being defined as passive, but I don't see anything about a lower rate.

I just see that this "passive activity" distinction subjects us to "passive activity loss rules", which limit our ability to offset other types of income with net passive losses.

But even that limitation is negated for us because we fall into the "active participation" exception, so we can offset our regular earned taxable income dollar-for-dollar with losses from our rental (if I understand the regs correctly).

I think he's referring to it as treating the income as capital gains instead of ordinary income. Capital gains is something like 15-20% depending on your tax bracket. If you are paying your marginal tax rate then you can contribute to the SEP because it is treated as ordinary income. As always consult your CPA before making a decision.

Under what circumstances would the income be treated as capital gains?

I am definitely going to talk this over with a CPA, but thanks for your help!

What you do is create a management company and charge out a fee to your rental properties. With this income, you then fund the solo 401k to effectively tax defer your earnings.

The guy above discussing tax rates doesn't know what he is talking about. It would only be applicable to capital gains and you are recaptured on most your depreciation. Also, any property investor would just 1031 exchange the property.

Good luck!

By the way - I loved the Sonics.... sigh.

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