Rental Income for Solo Roth 401K Contribution?

4 Replies

Hello!

I am in the process of qualifying rental income I received as eligible for contribution to a Solo Roth 401K

I manage rental of 3 apartment units I own. I have no other activity that I dedicate for making income.

Activities are significant. One unit is rented as a short-term rental in which I conduct the prep work. I manage reservation requests, rental payment, compilation of accounts, regular tax submissions, etc. I also manage all repair maintenance and routine property maintenance.

I have a registered LLC and EIN and have established a Solo Roth 401K.

I Understand that by default rental income is considered passive. However, I also know that should I materially participate in the rental as business activity it can be classified differently. Considering the level of interaction in the rental operations, it appears the activity would qualify me as self employed, but am hoping to confirm/verify.

* Is there a test/standard to reference in determining if the activity I conduct for the rental operations would result in the rental earnings be considered income from self employment?

* If so, would earnings be eligible for contribution to the Solo Roth 401K?

* How would I enter the earnings in the tax report programs as that which would be qualified for contribution to the Solo Roth 401K?

Originally posted by @Gary Noto :

Hello!

I am in the process of qualifying rental income I received as eligible for contribution to a Solo Roth 401K

I manage rental of 3 apartment units I own. I have no other activity that I dedicate for making income.

Activities are significant. One unit is rented as a short-term rental in which I conduct the prep work. I manage reservation requests, rental payment, compilation of accounts, regular tax submissions, etc. I also manage all repair maintenance and routine property maintenance.

I have a registered LLC and EIN and have established a Solo Roth 401K.

I Understand that by default rental income is considered passive. However, I also know that should I materially participate in the rental as business activity it can be classified differently. Considering the level of interaction in the rental operations, it appears the activity would qualify me as self employed, but am hoping to confirm/verify.

* Is there a test/standard to reference in determining if the activity I conduct for the rental operations would result in the rental earnings be considered income from self employment?

* If so, would earnings be eligible for contribution to the Solo Roth 401K?

* How would I enter the earnings in the tax report programs as that which would be qualified for contribution to the Solo Roth 401K?

Income that is not subject to the self employment taxes is not eligible. Even if you qualify as a real estate professional, your income is not earned income for a retirement plan. 

You can convert the passive income from the rentals to active income to establish a retirement plans, but you definitely need a professional help to determine if that is even doable based on your cashflow and other tax attributes. 

@Gary Noto

There shouldn't be a specialty...

Since rental activities are categorized as passive as you know, the material participation and active participation stuff is just for determining how/if you can take some/any of your losses on your 1040 or else they are carried forward.  Consult a professional, but self-repairs doesn't count as active employment and you normally can't pay yourself for your sweat equity.

Pretty much what you want to do is generally ill-advised because its less tax efficient. But, the only time I've heard it done for generating active income for retirement plans --- basically what you want. You need to actually pay yourself/LLC a wage/salary from the proceeds of your rentals. You definitely need to have some professional help to get the payroll accounting correct since that is always changing. Also, make sure the "reason/mechanism" for hiring yourself/LLC "works."

Anyway, that's the short, layman's explanation.  Basically, turn your passive income into active income subject to basically all taxes so you can consider earned income for contribution to a retirement plan.  Good luck.