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
"kastnna" wrote
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.
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
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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