Interaction of self-employment income and real estate investments

[UM1234]

Hello,

Client over age 50 is a self-employed consultant with no employees. Doing well and may end up netting > 265K in 2015. Also thinking of starting to invest in real estate. Most likely, he would be a passive investor, not an active participant. He is interested in putting away as much as possible for retirement, both from his SE income and his potential RE investments.

I have some questions:

1. SEP vs. solo 401k for SE income. If he were under 50, then if he nets > 265K I would say a SEP is better b/c it would allow the full 53K contribution and would be administratively simpler than a solo K. But b/c he is over 50, should he do a solo K even if he nets > 265K, so he can do the extra 6K catch-up contribution, which I don't believe is possible in a SEP?

2. Retirement contribution on real estate income. I don't encounter this very much b/c many real estate investors reinvest everything into more real estate. Here are a few thoughts/questions, looking for reactions:

2a. If he has negative income for tax purposes from the real estate due to depreciation, then he can't make a retirement contribution even if the real estate is cash flow positive. Correct?

2b. If he creates an LLC and buys property on his own, AND he has positive income for tax purposes, then I doubt he could do a solo K on the real estate income because the real estate LLC would be part of the same controlled group as his consulting LLC (where he is assumed to be maxing out his SEP or solo K). Could he do a SEP? A SIMPLE? Anything else I'm missing?

2c. If he invests passively and gets a K-1 for his share of income/deductions/credits, AND he has positive income for tax purposes, can he create any sort of retirement plan to shelter some of this income? Or would there need to be a retirement plan sponsored by the real estate investment company, which I doubt there would be?

Thank you in advance for any thoughts you can provide. I hope this thread will be useful to as many people as possible.

[Bird]

Agreed on point 1. Above a certain point, the only benefit of a 401(k) vs. SEP is the catch-up.

On the other points, I'm not 100% positive but I think he could make a retirement plan contribution based on his earned income, regardless of passive losses. And he only gets one 415 limit, so doing different plans for different businesses does not accomplish anything. If he wants more than a $53K deduction he should look at a defined benefit plan.

[UM1234]

Thank you so much for your helpful reply!

[Calavera]

He is interested in putting away as much as possible for retirement, both from his SE income and his potential RE investments.

Start a defined benefit plan with a solo 401k plan, and DO NOT invest in real estate.

[ESOP Guy]

I don't do small plans like this any more but I didn't think you could make any kind of qualified plan contribution based on real estate investment income you don't pay SE tax on. It sound like this person wouldn't be paying SE tax on the RE income.

I am more then happy to be told I am remembering it wrong or my thinking is out dated but that is my recollection.