BACKGROUND & QUESTIONS:
Last year we hired a property management company to manage the 4-plex apartment building I own in the self-directed Solo 401K. The company issued a 1099 with the gross rental income for 2021. How do I notify the IRS that this “income” is part of my 401-K and therefore not taxable?
ANSWER:
Not Taxable
While rental income is generally considered taxable income, as long as the rental property is owned by the solo 401k, annual taxes won’t be due on that income.
Rental income stemming from real estate property (e.g., single, home, family home, apartment, condominium, etc.) owned under the solo 401k ( a retirement trust) flows back to the solo 401k and is sheltered from taxes until distributions commence (generally at retirement age) from the solo 401k.
Therefore, if you receive a Form 1099-R MISC from the property manager, and even though they submitted a copy to the IRS, the form may be stored in your solo 401k file but you do not file it with your personal tax return, business tax return or any return for the solo 401k including Form 5500-EZ.
Properly Issued Form 1099-MISC
Make sure the Form 1099-MISC was issued to the correct payer. The form needs to be issued in the name of the solo 401k using the solo 401k plan’s EIN. If the property manager issued the Form 1099-MISC make sure to have it corrected immediately before they file it with the IRS, or request that they file a corrected form if they already filed it with the IRS. To ensure the property manager correctly issues the Form 1099-MISC to the solo 401k, provide them a with a copy of a Form W-9.
