Author Topic: Solo 401k For Rental Income?  (Read 14381 times)

Hubbard521

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Solo 401k For Rental Income?
« on: November 07, 2013, 04:59:42 PM »
Forgive me if this has been discussed; I wasn't able to find it if it was.

I recently purchased my first property, a 5 unit building that cashflows pretty well.  Am I able to shelter rental income into a solo 401k?  Would I be able to register an LLC and shelter income?  Or are there any other ways anyone can recommend sheltering rental income?

I greatly appreciate any advice.

Thanks.

Hubbard521

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Re: Solo 401k For Rental Income?
« Reply #1 on: November 10, 2013, 05:12:13 PM »
Anyone?

SunshineGirl

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Re: Solo 401k For Rental Income?
« Reply #2 on: November 10, 2013, 05:15:06 PM »
Buy another property that needs the cashflow from the five-plex?

Peony

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Re: Solo 401k For Rental Income?
« Reply #3 on: November 10, 2013, 06:18:38 PM »
I will be interested to see whether any of the more experienced landlords here chime in on this question, or if any tax experts do. My income in the last couple of years is only from rentals, and my tax guy has consistently told me I am not eligible to contribute to any kind of IRA. We have never discussed a solo 401K -- he's never suggested one and in fact he's advised me to keep investing for retirement via a taxable account. (I do have an IRA from previous office jobs, but I can't add to it.) If he is wrong or missing something, I'd love to know ... because I'd love to be putting money away into a tax-advantaged account.

arebelspy

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Re: Solo 401k For Rental Income?
« Reply #4 on: November 10, 2013, 06:22:51 PM »
Have you considered starting a corporation for the purpose of doing this?

Talk to your CPA about it.
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CWAL

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Re: Solo 401k For Rental Income?
« Reply #5 on: November 10, 2013, 10:16:30 PM »
Possibly have the rentals owned by an LLC, taxed as S-Corp, and pay yourself a salary to manage?

workwheniwantto

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Re: Solo 401k For Rental Income?
« Reply #6 on: November 11, 2013, 11:07:29 AM »
My income in the last couple of years is only from rentals, and my tax guy has consistently told me I am not eligible to contribute  ... I'd love to be putting money away into a tax-advantaged account.

My completely unofficial, unprofessional understanding is that you can only contribute earned income to an IRA and self-employed 401ks earned income and up to 20% profit sharing beyond that (to some limit in the 40/50-thousands I will likely never encounter so forgot).  So, theoretically, you could pay yourself a wage and contribute, and so long as you are okay with the fact you need to pay 15.3% FICA and whatever your state/local may require on wages.  Since I never plan to get at the principal (I am in my early 30s), I have decided to pay the extra % now to save on the taxes later (I estimate tax savings will eventually payoff the initial expense in about 7-8 years.)  Corporations may offer better solutions - I am not familiar with them personally. 

SunshineGirl

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Re: Solo 401k For Rental Income?
« Reply #7 on: November 12, 2013, 02:56:41 PM »
If your income is only from the five-plex, aren't you below the threshold where you'd owe anything?

In my case, I cannot put income from rentals into tax-deferred accounts. I can and do, however, contribute to a Solo 401K for my self-employment income (not rentals). On this income, I pay FICA.

If you're married and your spouse earns income, you are probably eligible to contribute based on his salary to traditional IRA, maybe a Roth IRA, too, not sure about that. 

Hubbard521

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Re: Solo 401k For Rental Income?
« Reply #8 on: November 18, 2013, 11:39:14 AM »
Thank you for the replies.

I need to look into starting a corporation with the intent of paying myself and funding a 401k.  I've been having difficulty finding reliable information on this from other real estate sites such as bigger pockets.  If anyone has a good resource with reliable information on the costs (taxes) and benefits of starting an LLC or S-Corp, please share!

SunshineGirl, to answer your question, I just quit my dayjob when I purchased this property at the beginning of September.  It cashflows about $2000/month after expenses, so I'd like to figure out a way to keep as much of that as possible.

Thanks again for the input.

Peony

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Re: Solo 401k For Rental Income?
« Reply #9 on: November 18, 2013, 06:35:55 PM »
I'd consider paying for a consultation with a CPA to get your questions answered as precisely and in as pertinent (to your particular situation, in your particular state, etc.) a way as possible. You can write the consultation off as a business expense. This is not the kind of stuff you can assume will be answered correctly by random folks on the interwebs. Even in this brilliant forum :)

Hubbard521

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Re: Solo 401k For Rental Income?
« Reply #10 on: November 19, 2013, 10:35:40 AM »
Peony, you are right.  That's probably the smartest and safest way to go about this.  Thanks.

Peony

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Re: Solo 401k For Rental Income?
« Reply #11 on: November 19, 2013, 10:51:03 AM »
Haha, I just reread a couple of my other posts in the forum and realized that I'm a bit of a broken record with the "Pay for an hour of CPA time" advice. That said, I love my tax guy (CPA) and really enjoy and get a lot out of the time I spend with him. It's not all that expensive and it is money well spent. He's a member of the team (which includes trustworthy plumbers, roofers, carpenters, etc.) I've put into place to keep my ship afloat and moving forward, is how I see it.
« Last Edit: November 19, 2013, 10:55:56 AM by Peony »

neoptolemus412

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Re: Solo 401k For Rental Income?
« Reply #12 on: November 23, 2013, 05:53:40 PM »
From the information given, you will have difficulty funding an IRA from rental income alone.  As mentioned, contributing to IRAs/401Ks/SEPs means you have to have earned income (compensation) during the year.  Rental income alone is not considered earned income. 

Here is a definition of earned income (compensation): Compensation does not include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation.

http://www.irs.gov/taxtopics/tc451.html

Now, where you can get creative depends upon how you setup your business.  If you have a 5-plex and you plan on adding more properties, you could consider creating a property management company to cater to your property (collect rents, maintenance, ect).  This could be setup as a separate entity that charges market rates.  From this income, you could fund retirement funds as your provide a service; however, this is a new business separate from your rental property's LLC.

Rental property income is difficult to shelter into tax-deferred accounts, unless you purchase the property through one of these accounts.  There are self-directed IRAs used to purchase real estate, but you already own the properties and you seem to be more interested in translating rental income to earned income to save on taxes.

As with the overall advice, I would get a CPA.  Paying for an hourly consultation most likely will result in generalist advice.  A good CPA should be able to look at your financial life and make an honest assessment of adjustments you could make.  It pays long-term and is a smart expense to take on. 

tj

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Re: Solo 401k For Rental Income?
« Reply #13 on: November 26, 2013, 06:37:17 PM »
Do some analysis and make sure the tax savings are worth all the extra costs. (FICA taxes, legal fees, business licenses, etc.)