Use real estate profit to fund 401k / retirement account

[Michelle R.]

My brother and I own together a few LLCs which generate 200k to 300k profit after expenses, per year. These are for commercial real estate we own. We have been passing this profit to ourselves as a K-1 distribution. We would like to instead put the money in a 401k. (This would have max contribution 54k with employer match). I believe a property-owning LLC can't open a 401k. How can we go about our goal of contributing to a 401k? Is there a related entity we can form to use for this purpose?

I would appreciate any and all insight on this! Thank you in advance.

[Dmitriy Fomichenko]

Michelle,

You can only use earned income to contribute to a retirement account. Rental income is passive and as such can not be put in a retirement account. If you are actively involved in a management you should check with your CPA if some of the income can be allocated as earned. 

The bottom line you need a good tax strategist, not just tax preparer or a CPA, Brandon Hall just recently wrote a nice article on this topic.