# Is rental income eligible for SEP or SIMPLE IRA contributions?



## Blue Skies (Jan 29, 2007)

Assume a husband and wife own some rental property under an LLC as a part-time side business.  

Can anyone here tell me if the rental income can be used to fund contributions to either a SEP or SIMPLE IRA?  

Does income used to fund a retirement plan have to be "personal compensation" or W-2 income?  How about self-employment income on Schedule C, and is it then subject to self-employment tax?  

Thanks to anyone who has some insight on this subject.


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## johnmfaeth (Jan 29, 2007)

Hi Blue,

I recall real estate investment income being considered passive income unless significant time was spent manging it. I doubt a timeshare would pass that test. I do not think passive income counts towards retirement plan calculations, only earned income.

If you go to the IRS web site at www.irs.gov, they have many publications online. The info above should help you get an answer from the horse's mouth (and the specific horse that always wants to be "fed").

Hope this helps!

John


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## JLB (Jan 29, 2007)

The fact that you are asking questions like this is good, a plus for you.

If you do a google search, you will find that the key is *earned income*.  You can fund a SEP with *earned income*.  And, certainly self-employed people can have *earned income*.

Now, search and find what all the IRS considers *earned income*, and you will have your answer.

Try IRS Publication 560.


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## Dave M (Jan 29, 2007)

The rental income does not qualify as earned income, which is also generally the same as income from self employment, e.g., a trade or business. Rental income from real and personal property is specifically excluded from that definition, except for the rare situation where someone whose business is buying and selling property receives rents incidental to that business. 

Another way to look at it is that the same income that qualifies as self employment income is also subject to the 15.3% self employment tax!

W-2 income normally won't qualify to justify contributions to a SEP, unless you are the employer and decide to set up a SEP for your employees (or for you, if you are the only employee).

Jim's suggestion to read IRS Publication 560 is a good one. Most of what you need pertaining to your questions is in that publication.


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