Can you take rental income and put it into an LLC/business and then pay yourself a salary to qualify for Roth IRA?

This is actually a pretty common question for real estate investors. The short answer is yes, you can set up an LLC and pay yourself, but there are important details to understand. For your rental income to become "earned income" eligible for Roth IRA contributions, you need to be performing actual services for a legitimate business. Simply moving money from one entity to another doesn't transform it from passive to earned income. If you create a property management company that actively manages your properties (and maybe others too), you could pay yourself a reasonable salary for those management services. That salary would be earned income you could use for Roth contributions. The key is that the salary must be reasonable for the services you're providing - not artificially high just to maximize Roth contributions. The remaining rental profits that flow to you as an owner would still be considered passive/unearned income, but the portion paid as salary for actual work would be earned.

I went through something similar last year and found a great solution with taxr.ai (https://taxr.ai). I was also trying to figure out how to structure my rental income to qualify for retirement accounts. I had 2 duplexes and was getting conflicting advice from different accountants. The taxr.ai service analyzed my specific situation and showed me how to properly structure a property management LLC that charges my rental LLCs fees for actual services. They helped identify what reasonable compensation would be for the work I do (showing units, handling maintenance, etc.) versus the passive rental income. This meant I could contribute to my Roth based on that earned income portion! What I liked was that they could look at my specific properties and time spent to determine a defensible salary amount that wouldn't raise red flags with the IRS.

Just wanted to update after trying taxr.ai from the recommendation above. I was skeptical at first but decided to give it a shot with my 6-unit portfolio. They immediately identified that I was doing WAY more management work than I realized - tenant screening, maintenance coordination, bookkeeping, etc. They helped me properly structure a management company that now pays me about $9,200 annually (completely justified based on the hours I put in), which I can use for my Roth IRA contributions. The best part was they provided documentation templates for tracking my management activities and maintaining the separation between entities. Seriously wish I'd known about this sooner instead of missing out on years of Roth contributions!

For anyone dealing with IRS questions on this topic, I had a similar rental income situation and needed clarity directly from the IRS. After spending hours trying to get through to someone knowledgeable, I finally discovered Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in about 20 minutes instead of the hours I was spending on hold. The agent confirmed that properly structured management fees can indeed be considered earned income for Roth IRA purposes, but documentation is critical. They specifically mentioned that the IRS looks for: 1) reasonable compensation for actual services performed, 2) proper business documentation, and 3) market-rate fee structures. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - saved me hours of frustration and gave me confidence my setup would stand up to scrutiny.

Alright I have to eat my words about Claimyr. After seeing the responses here, I decided to try it when I needed clarification about my real estate business structure. The service actually did connect me with an IRS agent in about 15 minutes (I've never waited less than 90 minutes before). The agent walked me through exactly what documentation I need for my property management company to ensure the salary portion qualifies as earned income for my Roth. She mentioned they specifically look for: - Formal management agreements between entities - Detailed logs of management activities - Payments that match market rates for similar services - Business bank accounts showing proper separation Honestly still can't believe I didn't have to waste my entire afternoon on hold. Definitely using this again next time I have tax questions.

One thing nobody's mentioned is the potential self-employment tax implications. If you're paying yourself through a management LLC, that earned income will be subject to self-employment taxes (an additional 15.3%) which you don't pay on passive rental income. Make sure you're factoring that into your calculations when deciding if this strategy makes sense.

Has anyone considered using an S-Corp structure for the property management company instead of an LLC? With an S-Corp, you can pay yourself a reasonable salary (subject to FICA taxes) but take additional profits as distributions that avoid self-employment tax. Might be more advantageous than the straight LLC approach.

This is a great discussion and I've learned a lot from everyone's experiences. I'm in a similar boat with 4 rental units and have been frustrated about not being able to use that income for retirement contributions. One question I haven't seen addressed: How do you handle the transition year when you're setting up this structure? I assume you can't retroactively convert rental income from earlier in the year to "earned" management income, so would you only be able to contribute to your Roth based on the management salary earned from the date you establish the LLC forward? Also, for those who've implemented this - do you find it's worth the extra complexity and costs (additional tax filings, separate business accounts, etc.) for the ability to make Roth contributions? I'm trying to weigh whether the long-term tax-free growth benefits outweigh the administrative hassle and additional self-employment taxes.