real estate investing flipping housesQualify for Solo 401k Flipping Properties: Periodically flippers contact us inquiring about setting up Self Directed Solo 401k in order to take advantage of powerful tax saving benefits it offers to the account holders. One in particular investor was following one of my blog posts where I describe features and benefits of this powerful retirement savings vehicle and was attracted by the ability to shelter large portion of his income into a qualified retirement plan.

He flips properties under his LLC and does it full time.  As you may know, one of the requirements of the Solo 401k is the presence of self-employment activity.  He wanted to know if he would qualify.  I directed his question to my good friend who is a CPA and here is his response:

Can I Flip Properties and Qualify for Solo 401 K?

Great question!  The answer is:  it depends!  A flipping activity 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 i.e. an occasional flipped home probably wouldn’t constitute a trade or business.

Also, if the self-employment activity 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 it 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 you are good to go.

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