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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience:  Over 20 Years experience
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1. As a sole proprietor licensed real estate agent actively

Resolved Question:

1. As a sole proprietor licensed real estate agent actively involved in real estate, can I open a Solo 401 K and contribute to it income other than earnings from real estate (such as from a pension) up to the allowable maximum amount?
2. Can I deposit in my solo 401 k proceeds from the sale of a rental property that I bought before I got my real estate license, up to the maximum amount allowed. Note: I was an “active participant” in managing this rental property, but it was considered a passive activity with carry-over losses from previous years in tax returns because I did not spend more than 750 hours or more than 50% of my time involved in real estate.
3. If I do not sell the above rental property, after I get my real estate license and work actively in real estate, can I deduct the cumulative carry-over losses in my first year working as a real estate agent, or do I need to wait until I sell the property to claim the multiyear losses.
4. If I QuitClaim a property that is held in my name to Tenants by the Entirety with my wife, won’t the transfer be considered a gift to my wife and be subject to income tax.
5. After I get my my real estate license and plan to actively work in real estate. can I deduct losses from a rental property from my ordinary income if I spend more than 750 hours managing that property in that year and spent more than half of my time involved in real estate? In the year they are incurred?
6. Do I have to pay self-employment social security tax on my real estate earnings.
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.
Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

You may contribute to a single person 401(k) up to your income from active real estate activities. Active real estate activities does NOT include net income from rentals. It would include broker commissions and other wage or commission income as a self-employed person filing either Sch C or receiving income on a K-1 from your partnership or S Corp.

You can deposit into this plan any previously taxed funds, no matter where they come from.

Note: If this entire question revolves around rental income, then real estate professional or not, NONE qualifies as EARNED income which is required for ANY type of retirement contribution.

Deductibility of real estate losses does first depend on any limits imposed by your income. If you meet the tests, UP TO $25K of losses can be deducted against ordinary income. Prior year Passive Losses may be released if you became a R/E Professional during the year, but again, you still have a limit.

You will pay SE Tax on any net income from self employment; again NOT from rental activities.

Customer: replied 1 year ago.

Thank you. Three follow-up questions:


 


1. You refer to "ordinary income" and "earned income". I am retired and receive a yearly pension of $175,000 including social security, and have been paying taxes on it. My wife has a pension of $140,000 and we have been filing jopintly. Are pension benefits considered ordinary but not earned income, and if so I guess I cannot put part of that money in a solo 401 K up to the maximum allowed per year. Correct? But, as a self-employed real estate agent, please confirm that I can contribute to a solo 401 K from "previously tax funds" including previously taxed pension income?


 


2. I take it that I cannot deduct up to $25,000 of rental losses because the deductability phases out after income reaches $150,000 even if my income from real estate is less than $100,000. Correct? In which case, is the only way to deduct the $75,000 cummulative loss from this rental property when I sell the property? That $75,000 loss includes straight-line depreciation; how much will need to be recaptured.

Expert:  R. Klein, EA replied 1 year ago.
Pensions are "ordinary" income in that it is taxed at the ordinary wage rate.

Pensions are NOT earned income.

You cannot rollover pension funds ton IRA or 401k contribution

If you deposited your pension cash into your bank account, you may certainly use that cash to fund your eligible 401(k)

You are correct that you have no eligible loss because it is subject t Passive Activity Loss limitations. The income limit is based on ALL sources.

Your loss carries forward until you sell the property.

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
R. Klein, EA and 10 other Tax Specialists are ready to help you

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