Solo 401K/ IRA and Tax concerns under my LLC

[Account Closed]

Hello, very new to this forum and this topic.  I am trying to put together the following information and would be grateful for any thoughts you all may have.

1.  I would like to take one of my current employer 401K's and make that self directed.  Once that is accomplished I would like to use that money to fund either hard money loans or purchase rental property.  Question:  I am assuming that either the interest from the loan or the rental income would be tax deferred?  Is that correct?

2.  I am also thinking about doing this with after tax money but would like to shelter as much of the loan interest and / or rental income from taxes.  I read some on this topic but I am getting confused on the terms Active vs. Passive income.  It appears Passive income is bad since it appears on my 1040 as regular income which means I cannot subtract my expenses first from this amount?  Is that correct?

3. I read in another blog that getting a mortgage for a home owned by a LLC is difficult? Why is that?

[Dmitriy Fomichenko]

Hello @Account Closed and welcome to the best real estate networking site in the world! As you engage with the community you will find this to be a great place for education, resources and potential deals.

Just wanted to add my two cents to the above comments. 

If you are going to be investing in a tax deferred environment (self-directed IRA or 401k), generally it works best with private lending (you mentioned hard money loans) and if you have after-tax funds (personal savings) - those would be best used by buying rental properties. The reason for that is you get tax benefits by personally owning real estate and you basically loose them with an IRA. 

If you are making those non-traditional investments with your retirement account, both: the interest from the loan and rental payments would be tax-deferred. However, if you use leverage to acquire rental property in an IRA then the portion of the income that comes from the financed portion of the property will be subject to UBIT (Unrelated Business Income Tax) which tops at 40% (Solo 401k is exempt from this tax).

The active vs passive income comes into play if you are trying to qualify for a Solo 401k. You need a business or self-employment activity that generates active income in order to be able to establish a Solo 401k plan (which is way more powerful and advantageous comparing to SD IRA), therefore SD Solo 401k plan will not work for everyone, but pretty much anyone can setup SD IRA.

Passive income in itself is not bad, I think it should be goal for every investor to create an income stream to replace any active or earned income and achieve financial independence. Wouldn't it be nice for you to have enough income coming in month after month without you doing anything (passive income)?