Turning Passive Income into Active quote from Ed

Submitted by David Wilson on Tue, 2023-11-28 20:43

Client has excess passive rental income and income from amortized note and is looking to make IRA or qualified plan contribution.

Ed says in Kiplinger article:

“Earnings and profits from property, such as rental income, doesn’t count as compensation. Rental income is considered passive income—that is, “money made on money,” says Ed Slott, a CPA and IRA expert
Slott suggests a couple of workarounds: You could form your own property-management company as a corporation or limited-liability company and become its employee. Then you could have a solo 401(k) (see www.irs.gov/retirement-plans/one-participant-401k-plans)”

Can you simply direct all the rental income into this corp or LLC and make yourself an employee? Would the IRS question if you have some active role rather than just collecting rent? Seems too easy.

Any help is appreciated.



Submitted by William Tuttle on Tue, 2023-11-28 23:42

  • Even though that article is several years old. I’m still pretty disappointed in how Ed glossed over what is necessary for rental income to be considered compensation.
  • By default rental income is “passive” income. The vast majority of rental property owners can’t even qualify as a Real Estate Professional (REP) necessary for it to be considered “active” income let alone “compensation.”
  • To be considered compensation eligible for retirement account contributions. You must be actively engaged in a Real Estate Business. Simply creating a property management corporation or LLC and funneling rental income thru one of the entities in and of itself does not meet the requirements.
  • In the Qualified Business Income Final Regulations from the TCJA of 2017. The IRS reiterated that the SCOTUS Higgins v. Commissioner is still the seminal ruling on what constitutes being; “engaged in a trade or business.”
  • Quote; “courts have established elements to determine the existence of a trade or business. The courts have developed two definitional requirements. One, in relation to profit motive, is said to require the taxpayer to enter into and carry on the activity with a good faith intention to make a profit or with the belief that a profit can be made from the activity. The second is in relation to the scope of the activities and is said to require considerable, regular, and continuous activity.”
  • While “considerable, regular and continuous” is not defined. Simple aggregation of rental income property income is not enough. It is generally held that it needs to be a real property management company with more activities than necessary to qualify as a REP.


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