Author Topic: Leveraging an Investment Property To Establish a SEP?  (Read 1355 times)


  • 5 O'Clock Shadow
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  • Age: 33
  • Location: Portsmouth, NH
Leveraging an Investment Property To Establish a SEP?
« on: May 17, 2017, 08:55:38 AM »
Hey Folks,

New to the forum but have been immersing myself in the content of MMM and like minded sites for some time now.

My wife and I are both 30 years old and currently W2 employees. Being a teacher, she has a pension and 403b plan that she can contribute to which is great, but I work for a small business without any retirement plan options. We do have an HSA plan which I max out and do not plan on tapping into (planning on paying for medical expenses out of pocket to maximize the benefit of the HSA as an investment vehicle). I have also been maxing out my traditional IRA and then socking away any additional funds into a taxable brokerage account. As I have gotten deeper into these FI resources I have been becoming more and more obsessed with finding ways to save additional dollars pretax.

We purchased a multifamily home 5 years ago which we have just finished renovating. We have been renting out two units and living in the 3rd since owning it. At some point in the next year or so we plan on purchasing a single family home and building an accessory dwelling unit for a second income generating property. Once we move out of our current property and rent the 3rd unit, we should have a positive cashflow of $1800 per month after setting aside a retainer for vacancy/repairs. The plan has been to put this towards our new mortgage. The accessory dwelling unit will be built using a HELOC leveraging the equity we have in our current multifamily. The HELOC should be paid down in 5-7 years using the income from the ADU and then that income can be diverted to cover the remaining portion of the mortgage on the single family allowing us to live without housing expense.

From a tax perspective, I see a lot of inefficiencies in the above plan. One work around that I was considering is setting up a property management LLC with the concept of paying myself a management fee (equivalent to the proceeds from one or both rental properties). Then using this active income to establish a SEP for myself and invest as much as I am allowed on a pre-tax basis. I can then use my W2 income to pay for my housing expenses instead of investing in a brokerage. Since we are trying to save a significant portion of our income anyways, I am basically trying to maximize the amounts that are saved on a pre-tax basis.

Does anyone have any experience with this or a similar concept for optimizing my situation?

Thanks in advance for any insight you are able to share!



  • Stubble
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Re: Leveraging an Investment Property To Establish a SEP?
« Reply #1 on: May 17, 2017, 09:11:46 AM »
I'm not a CPA but my first thoughts after reading the below is that your changing passive income to earned income.  Once you convert to earned income I believe you're only able to move 20-25% to an SEP and you'd be subject to additional taxes (SS, Medicare, etc) for the earned income. 

Just my thoughts at first glance! 


  • Handlebar Stache
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Re: Leveraging an Investment Property To Establish a SEP?
« Reply #2 on: May 17, 2017, 09:17:49 PM »
If you're going to continue investing in real estate--not saying you should do this--you don't need to route the money through a pension.

You can use your real estate instead of some pension.

That said, you can set up a property management entity which earns a management fee, creates wages, funds pensions, etc.... though it seems like a lot of work for the benefit involved. But people with very high incomes and net worths can do this and make out well.

BTW, you would need to pass the giggle test on this. You can't pay yourself some absurd management fee which destroys the return on your real estate but creates wages.

One other thing to consider: Wages mean you pay payroll taxes. Almost always, your pension tax benefits can't make up for these payroll taxes.


  • 5 O'Clock Shadow
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  • Age: 33
  • Location: Portsmouth, NH
Re: Leveraging an Investment Property To Establish a SEP?
« Reply #3 on: May 26, 2017, 05:28:31 PM »
Thank you both for the responses, makes sense regarding the additional income/payroll taxes. Seems like I would be over complicating things there for not a ton of benefit. I think I am just going to put a bit more pressure on the small business that I work for to implement a Simple IRA plan this year which will allow me $12,500 pretax. Additionally, when my wife goes back to work as a teacher (she is currently home with our 15 month old), we will be able to max out her 403B for additional pretax savings. As long as we stay under the income limits, I will continue to max out Traditional IRA's for us both. The rest will just have to be taxable investments... Could be worse off I suppose!

Thanks again.