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Q&A: IRA for passive investors

May 2014


I am 64 and retired. I was told I cannot open an IRA based on my commercial property income? Why? I pay estimated taxes. My rental income is the only source of income, other than a small pension payment.


You need to have earned income to contribute to an IRA. The amount of time you devote to managing the commercial property also should be considered. If y ou devote an extensitve amount of time toward the management and operation of the building, you might have the ability to consider yourself as an ‘active’ investor in real estate. The rules for active investors are quite different than passive investors.

For eg: if the commercial property you own is leased to a single tenant on a long-term lease, and the tenant takes care of all the issues related to the building and all you do is receive the rental checks, it would be hard to think of you as an active investor in real estate.

However, if you own a commercial building with 50 small tenants, and you devote most of your time to managing the leases, the bills for the building, repairs and cleaning operations, you could be considered an active real estate professional. You can look at Publication 925 on the IRS website for more information, but you must perform at least 750 hours of services relating to your building to be considered a real estate professional.

If you don’t qualify as a real estate professional, the IRS considers income from your biliding more like interest, dividend and other business investment income and not like a salary or other earned income.

While the IRA may benefit you slightly, we don’t see it as a determinant issue in preparing for your retirement at this time. Rather, the more important issue is looking at your investment property for ways to minimize your expenses and taxes.

For these reasons, please talk to accountant or tax professional.

Source: This question was directed to Samel Tamkin, a Chicago based real estate attorney and has been answered by him.