QUESTIONS:
Is there a limit to the number of houses that my Solo 401k trust can buy, rehab and sell? I am currently a Real Estate Dealer and do personally about 15 rehabs per year. As my Retirement accounts grow I am doing more rehabs with them. My goal is next year to do 10-15 rehabs through my retirement accounts and maybe 2-5 personally. Is this acceptable?
ANSWERS:
That is a very good question. While there are no limits on the number of houses that a solo 401k purchase and the rules do allow for the flipping of real estate inside a retirement plan such as a solo 401(k) plan or a self-directed IRA, it may not be as advantageous as investing retirement funds in rentals. Reason being, real estate is flipped inside an IRA or a solo 401(k) is viewed as an active business activity; therefore, a tax known as unrelated business income tax (UBIT) applies. The UBIT tax rate is quite steep- generally at a rate of 38% and applies each year on profits over one thousand dollars.
The onus falls on the solo 401(k) owner to both file a tax return (Form 990T) to report the unrelated business income tax (UBIT) as well as processing the tax payment.
Lastly, don’t confuse UBIT with UDFI as UDFI currently does not apply to solo 401k plans but it does apply to IRAs. Unrelated debt-financed income is whereby the solo 401k incorporates debt financing (a non-recourse loan) when investing in long-term buy and hold real estate.
