How to Use Defined Benefit Plans in Real Estate LLCs

 

A four-panel digital comic titled "How to Use Defined Benefit Plans in Real Estate LLCs." Panel 1: A financial advisor says, “You can set up a defined benefit plan…” Panel 2: A man thinks, “Can my real estate LLC use one?” with an image of a house and "LLC" beside him. Panel 3: The advisor replies, “Yes, if you have steady earned income.” Panel 4: The man smiles and says, “Awesome! I’ll rack up tax-deferred savings!” with dollar signs floating around him.

How to Use Defined Benefit Plans in Real Estate LLCs

📌 Table of Contents

What Is a Defined Benefit Plan?

A Defined Benefit (DB) Plan is a qualified retirement plan that promises a fixed annual retirement benefit based on a formula using salary and years of service.

Unlike a 401(k), where contributions are defined, a DB plan defines the payout goal and requires contributions sufficient to meet it.

This makes it especially useful for high-income business owners seeking large tax-deferred savings opportunities.

Can Real Estate LLCs Use DB Plans?

Yes. Real estate LLCs with consistent cash flow—especially those electing to be taxed as S corps or partnerships—can implement a DB plan for owner-members and employees.

The key requirement is that the LLC must generate earned income subject to self-employment or payroll tax.

Rental income from passive investments typically doesn't qualify unless the owner materially participates and treats the LLC as an operating business.

Benefits of Defined Benefit Plans for Real Estate Owners

🔹 Make contributions of up to $100,000–$300,000+ per year depending on age and income.

🔹 Slash taxable income, especially in high-revenue years from property sales or lease-ups.

🔹 Combine with a 401(k)/profit-sharing plan for even more tax sheltering.

🔹 Use DB plans as an exit strategy for aging landlords transitioning out of active management.

🔹 Boost employee retention if your real estate business has a team.

How to Set Up a DB Plan in an LLC

✔️ Consult with a pension actuary or third-party administrator (TPA) to draft the plan document.

✔️ Determine eligibility, contribution levels, and funding methods.

✔️ File IRS Form 5500 annually and monitor funding status.

✔️ Contributions must be made by the LLC's tax filing deadline (including extensions).

✔️ Most real estate LLCs also need payroll setup for owner-operators to meet “earned income” rules.

IRS Rules and Compliance

The IRS requires annual actuarial certification of the DB plan’s funding status.

Failure to contribute sufficiently may trigger penalties or underfunding liabilities.

Plans must also comply with nondiscrimination rules, although one-person plans are exempt.

If the LLC is dissolved or no longer profitable, the DB plan must be properly terminated with distributions or rollovers.

Conclusion

Defined benefit plans are powerful tax and retirement tools for real estate professionals with stable LLC income.

They offer outsized contribution limits, help reduce taxable profits, and position you for long-term wealth building.

Work with a qualified pension consultant and CPA to design, implement, and monitor your plan to remain fully compliant and optimized.

🔗 Related Resources

Learn more about DB plans for real estate businesses:











Keywords: defined benefit plan real estate, LLC retirement tax strategy, real estate pension setup, high-income tax shelter, solo DB plan