Self Directed 401K Taxation of Rental Income

[Patrick Hall]

I am looking for some initial advice (prior to hearing from my CPA) concerning the use of a self directed 401k to purchase and operated a multifamily real estate unit.  My primary question is one of "business" or "commercial" rental income tax (currently Ohio State).  I know my taxes from the rental income on a personal level are deferred until retirement but is the unit subject to "business" income tax?  For some reason I believe I heard someone on BP discussing commercial taxes that were unrecognized during their analysis of a property and it significantly impacted the returns.

Thanks in advance for any advice. 

Jimmy Patrick Hall

[Dmitriy Fomichenko]

Patrick, 

If your 401k owns multifamily real estate and receives rental income - this income will be sheltered from taxes. 401k is tax exempt entity and does not pay taxes on passive income. Some local municipalities may asses separate taxes (separate from the property tax). Your 401k would have to pay those assessments just like it would pay other expenses such as property taxes, property insurance, etc. For example, city of Phoenix, AZ charges special sales tax on all rental dwellings in the city, my property manager pays that of of the income and the rest goes into my 401k.