Invest Self-Directed Solo 401k in Physical Real Estate and Land

A self-directed solo 401k may own/invest in physical real estate (e.g., family homes, apartments, condominiums, commercial buildings and land), provided the 401k investment and prohibited transaction rules are satisfied. The 401k real estate investment rules are, for the most part, straight forward and pretty easy to follow. Following is a list of some of the 401k real estate investment rules.

Because the purpose of investing a solo 401k plan is to benefit the 401k plan so that you have enough money to live on when retirement distributions commence (usually at age 70 1/2), because the real estate investment is owned by the plan, you or certain relatives (e.g., spouse, children, parents, and grandparents) are restricted from using the property even if you use it for just a few days out of the year.

  • The 401k owned real estate may not be sold or exchanged to the 401k owner or his or her relatives mentioned above.
  • Improvements  or repairs on the real estate property may not be performed by the solo 401k owner or his her relatives mentioned above.
  • Expenses (e.g., property insurance, repairs and property taxes) in connection with the real estate investment must be paid with 401k funds, not the individual’s personal or business funds, unless the purchased was made under a tenants-in-common transaction which is covered below.
  • If only solo 401k funds are used to purchase/invest in the real estate property, title to the property has to be taken in the name of the 401k for the solo 401k owner’s benefit. For example:  Chestnut Solo 401k Trust F.B.O James Johnson, Trustee
  • Rental income and/or the real estate sale proceeds must flow back to the solo 401k, not the solo 401k owner’s personal or business bank account.
  • If, however, the self-directed solo 401k is invested in an LLC, title to the property is taken in the name of the LLC not the 401k, so expenses and gains flow to the LLC bank account and ultimately the solo 401k bank account. For example: Seabreeze LLC
  •  If an in-plan Roth 401k conversion includes the real estate holding, the property must be appraised (FMV) prior to processing the in-plan Roth solo 401k conversion because taxes must be paid on the value converted.
  • In the case of a tenants-in-common transaction where the solo 401k owner also invests his or her personal money in addition to solo 401k funds, the following must be taken into account:

  1. Title to the real estate property is taken both in the name of the 401k and the solo 401k owner’s name.
  2. For example,  James’ real estate agent finds a rental home in Houston, Texas that costs $300,000, so James decides to use $150,000 of personal funds and $150,000 of solo 401k to purchased the property.
  3. Under this tenants-in-common scenario, title to the rental property would be taken in the following fashion: James Johnson, an undivided 50% and Chestnut Solo 401k Trust, an undivided 50% interest
  4. Under a tenants-in-common transaction, no debt financing may be used and all investors (e.g., in the above scenario James personally and his solo 401k) must fund the real-estate investment at the same time. Also, all expenses and income must be divided based on how much money each party to the transaction invested in the property. In the above example,  it would be a 50/50 split.

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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