Solo 401k, LLC taxed as a sole prop, tax minimization strategy

[Erik Kubec]

Hey folks,

Any thoughts on the efficacy of this strategy?:

We own several SFD rental properties held in our names.  We file jointly a 1040.

I have a single member LLC taxed as a sole prop. This LLC holds another property. This LLC has a solo 401k.

The contribution to 1040 gross income (after depreciation et al) via LLC-as-a-sole-prop to our 1040 will be about $4000. Our tax rate on the margin for that is 33%, so $1320 to the IRS.

Let's say that I as the member/employee of the LLC did 100 hours of work on the 3 properties (not the one held by the LLC!!!) at $40 / hr = $4000. So that $4000 becomes an expense item of the properties, thus no $$$ from the properties to be taxed.

Then, through the LLC solo 401k, I choose to defer %100 of the $4000 into that solo 401k.

I believe that I just lowered my tax bill for TY 2015 by $1320.

Anyone see any problems with this?

-Erik

[Brian Eastman]

Erik,

Am I correct in understanding that you are calling a LLC that holds property producing passive rental income as the sponsoring employer for a Solo 401(k)? Passive rental income is not the same as self-employment income and would not qualify to sponsor a Solo 401(k) in the first place.

Services you provide to yourself are not typically deductible.

I strongly suggest you have a sit-down with your licensed tax professional.