BACKGROUND: My wife and I own a small real estate company. Today primarily we deal with real estate sales.
We are interested in learning how we might direct funds from a Solo 401k to invest in real estate rental property.
– What are the costs for setting up the 401k?
ANSWER: Please click here to visit solo 401k pricing page.
– What are the ongoing monthly or annual maintenance fees?
ANSWER: An annual flat fee of $125 applies regardless of account balance.
– What are the restrictions on owning property through the 401k funds?
ANSWER: There is no restriction regarding the type of property; however, please click here to learn about the restrictions that apply with respect to self-dealing and prohibited transactions.
– Do we need to set up a separate company to deal with the property ownership?
ANSWER: No as title can be taken in the name of the self-directed solo 401k trust.
– If my wife and I were to pass away how would the property be dispersed to survivors?
ANSWER: The assets of the solo 401k trust including the real property would be paid out in accordance with the 401k beneficiary regulations. Click here to learn about the beneficiary regulations.
How are death estate taxes handled?
ANSWER: estate taxes do not apply to retirement plans including self-employed plans such as a solo 401k plan when the beneficiary is an individual. This why it is important to name a beneficiary as the plan’s funds will flow to the estate in the event the beneficiary is not named and the spouse has passed away. It is important to note here that pursuant to the 401k regulations the spouse is the primary beneficiary unless he or she elects in writing to waive his or her consent (spousal consent).
– Are there legal structures such as residence trusts that would be advantageous for the property ownership?
ANSWER: No as the solo 401k is a trust and thus considered a separate entity.
– Are there legal restrictions for who can rent the home? Should everything be handles through a property management company?
ANSWER: Yes there are restrictions. For example, the property cannot be rented by the solo 401k account owner(s), the account owner’s spouse, parents, and children, to name a few. For a full list click here. However, the solo 401k owners can manage the properties provide they are not compensated.
– How is rental income managed recorded? Directly to the 401k account?
– How would capital gains be handled if we were to sell a property? Proceeds to the 401k account? Are taxes delayed until they are drawn or would there be taxes triggered because of the sale?
ANSWERS: All income and expenses must flow through the solo 401k bank account because the solo 401k owns the property, not the solo 401k owner’s personal bank account. Capital gains do not apply to tax shelter accounts such as IRAs and 401k plans. Instead, income tax applies to distributions from retirement plans including solo 401k plans, but not until distributions commence (usually at retirement age). To learn more about the solo 401k distribution rules, click here.