Can Flipping be Used As Self-Employment Activity to Qualify for Solo 401 k
Can flipping qualify for a Solo 401k?
We periodically hear from readers who want to know if they might qualify for a Solo 401k through flipping. The Self Directed Solo 401k offers powerful tax saving benefits, but it requires self-employment to qualify. Does flipping qualify as the self-employment activity required for the plan?
Dmitriy was recently contacted with this question by a follower of his blog posts on BiggerPockets. After reading about the features and benefits of the Solo 401k, this reader was attracted by the ability to shelter a large portion of his income into a qualified plan. He flips properties under his LLC full time and wanted to know if he would qualify.
Dmitriy directed the question to a CPA. Read on for his response:
Can I flip properties and qualify for Solo 401 K?
Great question! The answer is: it depends!
Flipping would be considered a trade or business and, therefore, subject to the self-employment tax (and eligible to be considered compensation for a Solo 401 k), if the “flipper” is considered a “dealer.”
In order to be considered a dealer, the activity needs to rise to the level of a trade or business – the activity must be regular and continuous. In other words, an occasional flipped home probably wouldn’t constitute a trade or business. Also, if the flipper has another full-time job and flips as a side activity, then the activity probably wouldn’t be considered a trade or business.
It appears that, in your client’s case, that the flipping is full-time and would, therefore, be considered a trade or business. The client may, however, be treating the activity as an investor on his tax return in order to get capital gain treatment. If so, that would preclude making a Solo 401 k contribution on the income. If the client has been reporting the income as self-employment income, then he is good to go.
Related Terms:
- Qualify for Solo 401 K
- Self Directed Solo 401k
- Real Estate IRA
- Solo 401k Real Estate
- Buy Real Estate with IRA
- Buying Real Estate in IRA
- Buying Real Estate with IRA
- Checkbook IRA Real Estate
- IRA for Real Estate