Can I manage real estate owned by My Solo 401k?

While the solo 401k owner/trustee will generally manage real estate, including rental properties owned by  the Solo 401k , the solo 401k trustee cannot perform repairs as doing so is considered a prohibited transaction.  Managing an asset of a solo 401k such as as real estate is one of the main functions of the solo 401k trustee. However, just like the solo 401k trustee cannot receive compensation for managing other assets or other aspect of the solo 401k plan, the solo 401k owner trustee may not receive compensation for managing real estate owned by the solo 401k plan.  In other  words, referred to as the exclusive benefit rule, only the Solo 401k plan may benefit from the transaction, not the Solo 401k Trustee/participant, nor may any other disqualified person receive a personal benefit as a result of a transaction performed under the Solo 401k plan.

Since a Solo 401k is a type of 401k, but for the self-employed with no full-time employees, it falls under ERISA Sec. 406, the section pertaining to prohibited transactions, in addition to IRC 4975 under the Internal Revenue Code.

The sections of the prohibited transaction rules that directly deal with whether or not the management of real estate owned by a Solo 401k is prohibited or not fall under ERISA Sec. 406(a), and IRC 4975(c)(1)(C), respectively, which detail the that:  “Furnishing of goods, services, or facilities between a plan and a party in interest is prohibited.”

This is interpreted to mean that under the Solo 401k rules the solo 401k owner is not permitted to provide more than ministerial services to manage Solo 401k owned assets. The prohibited transaction rules are not specific about all those activities that might be considered ministerial versus “goods and services”; however, in general you can act as an intermediary in directing the activities of other unrelated parties who can then provide goods and services to your Solo 401k owned asset (e.g., paint the rental property). When paying maintenance expenses in connection with real-estate (e.g., rental property), the trustee of the Solo 401k must pay those expenses using Solo 401k funds not personal funds.

Further, the solo 401k trustee/owner can direct all the activities surrounding her Solo 401k investments and, for example, select vendors and tenants. However, the solo 401k owner cannot perform any sweat equity work on the solo 401k owned property (e.g., put a new roof on the property) as it would be considered the “furnishing of goods and services.”

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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