Can a 401k shelter K-1 income?


K

kastnna

I have a 5 member LLC that owns comercial real estate for which the
LLC receives rents. The members receive pass-through income and a K-1
annually. Can this income be diverted into a qualified retirement plan
(either employee or employer, doesn't matter which)?

Thanks
 
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P

paulthomascpa

kastnna said:
I have a 5 member LLC that owns comercial real estate for which the
LLC receives rents. The members receive pass-through income and a K-1
annually. Can this income be diverted into a qualified retirement plan
(either employee or employer, doesn't matter which)?



Nope. At least not as it is currently distributed to the partners. Rental
profits retain their "not earned" status - ie: not subject to SE or
employment tax.

Only earned income, subject to Self-Employment or payroll taxes, can be used
for any qualified plan like an IRA, 401k, SEP, etc.

Rental profits never have been allowed for that purpose.
 
K

kastnna

Nope.  At least not as it is currently distributed to the partners.  Rental
profits retain their "not earned" status - ie: not subject to SE or
employment tax.

Only earned income, subject to Self-Employment or payroll taxes, can be used
for any qualified plan like an IRA, 401k, SEP, etc.

Rental profits never have been allowed for that purpose.
Thank you, sir. I suspected it was an "earned v. unearned" issue.
 
G

Gene E. Utterback, EA, RFC, ABA

kastnna said:
Thank you, sir. I suspected it was an "earned v. unearned" issue.
True, BUT maybe the earnings, or some of them can be recategorized.

If the LLC members actively participate in the management of the rental
COULD they draw a salary (or since it's an LLC guaranteed payment to
members) and consequently reclassify those draws as earned income, subject
to SE tax? I don't know the answer, but I have several clients who've
raised the question and I'm looking into it. I have not had particularly
good luck in finding anything that specifically allows this - BUT neither
have I found anything that expressly prohibits it either.

And yet, I'm still not comfortable in sanctioning it.

Good luck,
Gene E. Utterback, EA, RFC, ABA
 
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H

HLunsford

True, BUT maybe the earnings, or some of them can be recategorized.

If the LLC members actively participate in the management of the rental
COULD they draw a salary (or since it's an LLC guaranteed payment to
members) and consequently reclassify those draws as earned income, subject
to SE tax? I don't know the answer, but I have several clients who've
raised the question and I'm looking into it. I have not had particularly
good luck in finding anything that specifically allows this - BUT neither
have I found anything that expressly prohibits it either.

And yet, I'm still not comfortable in sanctioning it.
I guess that's why I favor having LLC's choosing the S corporation option.

ChEAr$,
Harlan Lunsford, EA n LA
 

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