QUESTION: I’m considering transferring my Individual 401k at Pacific Life Insurance to a solo 401k for investment property purposes. Do you know what the process is for buying investment property with a solo 401k?
ANSWER: When a solo 401k plan buys investment property, it falls under the solo 401k investment umbrella of permissible solo 401k investments. For a list of impermissible solo 401k investments click here. Following are the main items to consider in the solo 401k investment property process:
First, the investment property that the solo 401k plan invests in may not be one that you already personally own or have owned in the past. Reason being, it is prohibited for a solo 401k to purchase a property that you or any other disqualified party (e.g., your children, spouse or parents, to name a few) already own or for you to transfer or exchange the investment property to the solo 401k. This falls under the following specific prohibited transaction clause:
- The sale, exchange, or lease of property between a plan (solo 401k plan) and a disqualified person;
Second, as the solo 401k owner/trustee, you may not use the solo 401k owned investment owned property, whether for vacationing or for renting, even if you pay the solo 401k for doing so. The same holds true for a disqualified party—that is he or she may not use the solo 401k owned investment property.
Third, as the solo 401k owner/trustee, you may not perform repairs on the solo 401k investment owned property because you are a disqualified party; however, you may manage the property (i.e., hire contractors to perform the repairs, look for tenants, and collect the rent checks), provided you do not receive compensation for doing so.
Fourth, once you understand the solo 401k investment property rules and are ready to invest the solo 401k plan in investment property, title to the property must be taken in the name of the solo 401k plan since solo 401k funds are being used.
Fifth, the income and expenses associated with the solo 401k owned investment property must flow to and from the solo 401k bank or brokerage account. Please click here for a full procedure surrounding investing a solo 401k in investment property.