Can rental income be put in a solo 401k?

Question

Can you take rental income from a rental property and put it in a solo 401k and therefore delay the taxes on the rental income?

Justin Windham · Answer

A Solo 401k can purchase a rental property and in this case can and should receive the rental income which will have the special tax treatment of the Solo 401k (either tax deferred or tax free depending on the type of 401k funds used for the investment).

What cannot happen is a transfer from a disqualified person to the Solo 401k. If the rental property you are referring to is owned by you, the property cannot go into your Solo 401k as this would be a prohibited transaction.

Dmitriy Fomichenko · Answer

Kyle, you can not take rental income from a rental property that you own and put that into a Solo 401k (if you had one). Only earned income can be contributed into Solo 401k. Rental income is considered to be passive.

However, when you own a rental property you can legitimately deduct from the income all of the expenses related to that rental property. And in addition to that you can deduct property depreciation, which is not an expense that you incurred, it's a paper loss and one of the great benefits of owning real estate.

Thelonious Jones · Answer

I do not believe that is possible.

However I would check with a 401k/self-directed professional and/or tax accountant/advisor that can help you with your particular situation.

Dmitriy Fomichenko · Answer

@Ryan Nunya

I think you may be referring to contribution...??? You can contribute about $20K into Roth 401k. Typically there is no limit on the Roth conversion, if the plan allows this... But Brian is correct, your statements are unclear and you seem to confuse different concepts so it would be best sorted out on the phone with the expert.

Brian Eastman · Answer

@Ryan Nunya

You need to speak with an expert.  You are mixing concepts and terms to the point where it would be difficult to sort out on a web forum. (Which is not unusual, so don't feel bad.)

The Solo 401(k) has very powerful contribution capacity for either tax-deferred or Roth tax treatment.  You can also perform in-plan Roth conversions of tax-deferred funds.

Ryan Nunya · Answer

@Brian Eastman

Hi Brian, I am learning about the Solo K so please correct me if wrong, but you can do up to a 20k Roth conversion with after tax money into the SoloK. ( This is not the mega back door Roth. ) Then use that money for the tax free financing if I am correct. I believe that his goal is the 50k loan as that was my goal in creating the soloK as well.

Rajeev Kotyan · Answer

@Peter Bowring: Brian has hit the nail on the head: "Why turn passive investment income into self employment income...", this is taking away from the intent of the passive investment, but then the example you state is one specific to you. It is very much possible and you would want to run all the numbers appropriate to your specific case to see if (a) it is doable, (b) what are the limitations, (c) what is the short term and long term tax consequences for you, for which you would want to work with a qualified professional who can analyze your specific case and provide you with the correct options.

Peter Bowring · Answer

Right I understand that, just a question for the original post's question of if it was possible...similar to paying your kids to paint or rake at rentals to provide them with income, instead of "free" allowance, which they can then use to fund IRAs.

Brian Eastman · Answer

@Peter Bowring

That typically does not make sense.  Why turn passive investment income into self employment income subject to self employment taxes, so that you can then take that income and defer it into a retirement plan?

Retirement plans are funded either from W-2 wages or self-employment income.  Passive investment earnings cannot be use to contribute to a retirement plan.

Can rental income be put in a solo 401k?

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