Is solo 401k for sole-proprietor landlord possible?

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dawoof
Posts: 16
Joined: Tue Jun 18, 2019 8:34 pm

Is solo 401k for sole-proprietor landlord possible?

Post by dawoof » Thu Aug 15, 2019 12:38 pm

Hello,

We are trying to figure out if there is a way for landlord who self manages properties to open a solo 401k.
We own 7 properties and do all the work except major repairs.
A kind poster had suggested we looked into setting up solo 401k.
Would greatly appreciate hearing from any landlord with experience setting up solo 401k for their property rental business.

We have read the IRS rule and got these three feedback:
1) Our CPA thinks that we can deduct a percentage of rental income but we are not qualified for the IRS rule as both employer and employee. Therefore, we cannot maximize the contribution. He also thinks that a SEP IRA might be a better way to go.
2) Another CPA thinks we might be able to maximize contribution amount but some separate partnership returns be set up for some of the properties to create "earned income".
3) Solo401k also believes we should be able to maximize the amount "assuming you both work in the business and report your income on Line 31 of a Schedule C, you could open a Solo 401k. Furthermore, you would be able to make contributions based on the income reported in line 31 of the Schedule C."

In the past, we have only reported rental income on Schedule E. So we are not sure if this will suddenly raised a flag for the IRS.
Our rental income after depreciation is about $20k on Schedule E.
We would like to be able to put all of that into a Roth solo 401k.
Husband no longer has earned income, only SSI & pension.
Wife manages the rental business and has no other income.
So we won't be able to contribute to IRAs either.

Tried searching the forum but did not find much discussion on the topic. Info on the web is also non-conclusive.

Thank you.

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MP123
Posts: 1007
Joined: Thu Feb 16, 2017 3:32 pm

Re: Is solo 401k for sole-proprietor landlord possible?

Post by MP123 » Thu Aug 15, 2019 7:18 pm

Only earned income qualifies for a solo 401k. So passive rental income from schedule E doesn't help.

I'm not sure if it's possible (or even advisable) to restructure your passive rental income as business that pays you a salary or generates schedule C self employment income but that would be the way to make 401k contributions with that income.

SandysDad
Posts: 58
Joined: Wed Dec 06, 2017 7:27 am

Re: Is solo 401k for sole-proprietor landlord possible?

Post by SandysDad » Thu Aug 15, 2019 9:10 pm

MP123 wrote:
Thu Aug 15, 2019 7:18 pm
Only earned income qualifies for a solo 401k. So passive rental income from schedule E doesn't help.

I'm not sure if it's possible (or even advisable) to restructure your passive rental income as business that pays you a salary or generates schedule C self employment income but that would be the way to make 401k contributions with that income.
agreed!

jenw930
Posts: 22
Joined: Sat May 20, 2017 7:10 am

Re: Is solo 401k for sole-proprietor landlord possible?

Post by jenw930 » Thu Aug 15, 2019 11:55 pm

I researched this a bit for my family’s business. Sole proprietor landlords can’t do it. We are incorporated and I could pay myself a W2 wage instead of a 1099 “property management fee”.

But I own the business with my Mom and they will only allow solo 401k for H/W teams.

From everything I read, it seems like a great opportunity to build up tax advantaged savings. Incorporation is a bit more trouble and expense but adds a layer of liability protection to your business so may be a good solution for you anyway.

Spirit Rider
Posts: 11017
Joined: Fri Mar 02, 2007 2:39 pm

Re: Is solo 401k for sole-proprietor landlord possible?

Post by Spirit Rider » Fri Aug 16, 2019 1:57 am

jenw930 wrote:
Thu Aug 15, 2019 11:55 pm
But I own the business with my Mom and they will only allow solo 401k for H/W teams.
Not necessarily true. A partnership with no non-spouse eligible employees can adopt, maintain and contribute to a one-participant 401k plan. An S-Corp is considered a partnership for one-participant 401k plan purposes. Only in a C-Corp is a one-participant 401k restricted to a husband and wife and no non-spouse eligible employees.

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