3 Ways Self-Employment Income Can Turn Your Real Estate Investments Into Retirement Benefits

Per the IRS, investment income is not eligible for a retirement plan contribution. So, how can you save for retirement if you make a living in real estate? Here's a strategy that many real estate professionals employ—and how it could work for you.

Jennifer Verly March 9, 2018

The IRS stipulates that only income earned from working is eligible for a retirement plan contribution. This means that investment income, such as rental income, cannot be used. One strategy used by many to work around this stipulation is to create a property management company that bills the rental partnership for its management services. This creates self-employment income, which qualifies as “earned income” and is therefore eligible for a retirement plan contribution. Some will bemoan this strategy because it also creates self-employment tax. But, in many cases, the pros of the self-employment income will far outweigh the cons of the tax. Here are three benefits of this strategy:

  • A strong retirement portfolio – Because self-employment income is eligible for a retirement plan contribution, this strategy allows you to save for retirement, even if you are, in fact, a real estate professional. And there are lots of options, ranging from a profit-sharing 401(k) to a defined benefit plan. You could even set up a self-directed IRA, which is the only type of IRA that can be invested in real estate. This means you could purchase real estate within the IRA without tax consequences.
  • Health care deductions – Real estate professionals are unable to write off their health care plans, but self-employment income allows you to make health care an above-the-line deduction. In other words, if you spend $10,000 on your health care, you can write off $10,000.
  • Qualify for Social Security – If you’ve never generated earned income, you’ve never paid into Social Security. And this means you won’t qualify for Social Security when you retire. By generating self-employment income, you’re also—through self-employment tax—contributing to Social Security. Thus, you would be eligible to collect Social Security in retirement.

These three benefits may, in many cases, outweigh the detriment of self-employment tax. In other words, the potential write-offs and Social Security benefits that come along with it may justify paying a tax bill. There are so many ways you can structure this type of strategy, especially when it comes to your retirement plan contributions. It’s important to involve a tax professional to help you determine if it makes sense for you.