401k real estate investing | 401k real estate investment

QUESTION: I’m thinking of using a 401k for real estate investing but can’t find IRS language allowing for real estate as a 401k investment. Can you please point me to where in the 401k rules it says real estate is an allowable investment?

Thanks, John A. in Florida

ANSWER:  You should stop looking for language in the IRS or ERISA codes that specifically detail real estate in a 401k is an allowable investment.  Reason being, the IRS and ERISA codes only tell you what investments are not allowed in a retirement account such as 401k or an IRA. This is probably one of the reasons why it is estimated that less than 2% of 401k plans are used for real estate investing. It is just not heavily advertised or promoted by wall street.

Because the IRS code does not list real estate as a prohibited 401k investment, it is considered an allowable investment, provided the prohibited transaction rules are followed, which will be disused below shortly.  First, however, it is important to note that the section of the IRS code that specifically lists those investments not allowed in a 401k or an IRA is IRC 408(m). In this code section, you will find a list that includes the following as disallowed investments but not real estate.

Any work of art,

any rug or antique,

certain metals,

any gem,

any stamp or coin, and

any alcoholic beverage.

When investing a 401k in real estate, whether one through your employer or your solo 401k if you are self-employed, you need to follow the 401k prohibited transaction rules found under 4975 and ERISA Sec. 406.  Basically, the 401k prohibited transactions detail that you cannot use your 401k to invest in real estate for your personal use as it is considered improper use of 401k assets and it results in a prohibited transaction. Reason being, the 401k owner/participant falls under the disqualified party umbrella (other disqualified persons include your spouse, son, daughter, your natural parents, your 401k provider, and anyone else providing services to your 401k).

What’s more it would be prohibited for you to receive a personal benefit as a result of investing the 401k in real estate. For example, if you are a real estate broker and receive a commission check for handling the 401k real estate investment transaction, it would be deemed prohibited because you are a disqualified party. On the other hand, if you brokered the 401k real estate investment transaction and did not receive a fee for doing so, it would not be prohibited because you are not receiving a personal benefit from your 401k’s transaction.

In sum, investing your 401k in real estate is permitted as long as it is rented to a non-disqualified party, maintained (repairs performed by a non-disqualified party), expenses paid with 401k funds (you cannot use personal funds) and profits flow back to the 401k.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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