QUESTION 1: Can you purchase real estate from your own solo 401k?
ANSWER: While the solo 401k rules do not permit for the purchase any asset including real estate from ones personal solo 401k, the solo 401k owner can distribute the solo 401k asset (e.g., metals, notes, private shares, and real estate) from his or her solo 401k plan. When real estate is distributed to the solo 401k owner from a solo 401k plan, this is known as an in-kind distribution of real estate.
QUESTION 2: How does an in-kind distribution of real estate differ from the purchase of real estate from your own solo 401k?
ANSWER: The difference has to do with the payment of taxes and not breaking the prohibited transaction rules.
In-kind distribution: For instance, by taking an in-kind distribution of real estate from your solo 401k plan, instead of taking a distribution of cash, the in-kind distribution is still subject to income taxes, and early distribution penalties if you are under age 59 ½ at the time of the distribution. The end-result is the solo 401k owner now owns the real estate outside of the solo 401k plan and can thus use it for personal use because it is no longer held in the solo 401k.
IMPORTANT: Before processing an in-kind distribution of real estate from your solo 401k, the property must be appraised in order to ensure income tax and early distribution penalties are paid on the correct value. Not obtaining an appraisal on the property prior to the in-kind distribution may subject you to payment of back taxes if the real estate property was worth more at the time of the distribution.
Purchasing real estate from your solo 401k: On the other hand, if you purchase the real estate directly from the solo 401k, the purchase will be deemed a prohibited transaction because, as the solo 401k owner, you fall under the solo 401k disqualified party umbrella. Thus, by purchasing the real-estate property from your solo 401k, you would be depositing personal funds into the solo 401k, which would be deemed a sale and exchange between the plan and a disqualified person.
IMPORTANT: When the solo 401k owner subjects his or her solo 40k to a prohibited transaction, the entire value of the solo 401k is deemed to have been subjected to a prohibited transaction, not just the particular asset (e.g., one real-estate property) that was involved in the transaction.