Can I convert Rental Income from Schedule E to Active Income on Schedule C?

10 Replies

I have several Rental Properties owned by my wife and I, we manage by ourselves, so we have positive Rental Income on Schedule E. but negative Income on Schedule C, can I put $3000 Property Management Fees as expense on Schedule E, and add this $3000 as Earned Income on Schedule C?

The reason we want to do this is, we want to contribute the money to solo 401K, only the earned Income can contribute, the passive income can not contribute to solo 401K, right? so we want to reduce the rental income on Schedule E and increase the earned Income on Schedule C. any suggestion, I will really appreciate!

Only on Schedule E unless you are providing active services for them.

You are correct that you need to have earned income in order to contribute to a 401k. But without knowing anything about your tax bracket, why not just contribute to a Roth IRA?

Originally posted by @Steven Hamilton II :

Only on Schedule E unless you are providing active services for them.

Hi Steven,

My wife has CA Real Estate Agent license, she and I manage all properties, from screen Tenants to maintain / Repair all Properties, does that count the active Services?

Thanks

@Gary Li rentals will be reported on Schedule E unless you perform substantial services for your tenants (think hotel services such as: regular cleaning, changing linen, or maid service).

Now, there is a possibility that you can qualify for the real estate professional designation, and if so, you can currently deduct against your income your suspended passive losses and current passive losses without limit. Form 8582 is used to determine passive losses allowed.

Read more here.

I appreciate everyone's help, thank you for all the suggestions!

Originally posted by @Brandon Hall :

@Gary Li rentals will be reported on Schedule E unless you perform substantial services for your tenants (think hotel services such as: regular cleaning, changing linen, or maid service).

Now, there is a possibility that you can qualify for the real estate professional designation, and if so, you can currently deduct against your income your suspended passive losses and current passive losses without limit. Form 8582 is used to determine passive losses allowed.

Read more here.

Hi Brandon,

How about if I form a LLC (Husband and Wife) to manage all our properties, can I put the Properties Management Fees on Schedule E as expense, and Income on Form 1065 for the LLC, does IRS allow using this way to shift the Passive Income to the Active Income?

Originally posted by @Gary Li :

Hi Brandon,

How about if I form a LLC (Husband and Wife) to manage all our properties, can I put the Properties Management Fees on Schedule E as expense, and Income on Form 1065 for the LLC, does IRS allow using this way to shift the Passive Income to the Active Income?

 Good question, I'd be interested in hearing the answer too.

I think what you are asking @Gary Li is if you can bill yourself $3,000 to manage your own real estate, correct? I'd think the answer is no on that one. You can't create a taxable event with yourself. Is that what you are looking to do? Essentially it's all your money even though it's in an LLC. Maybe @Brandon Hall can clarify. 

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