It is acceptable for the Self-Directed Solo 401k to invest in a joint venture to invest in real estate provided that:
(i) the other party is unrelated to you;
(ii) the terms of the joint venture (e.g. including security interest in the event of default, etc.) are negotiated on an arms’ length basis and documented in an agreement;
(iii) such agreement and any other related documents (if applicable) such as the title, etc must reflect the name of the Solo 401k where you sign as the trustee of the Solo 401k;
and (iv) the rules regarding investing your Solo 401k in real estate is otherwise followed including
- Real estate investment procedures: https://www.mysolo401k.net/solo-401k/solo-401k-real-estate-investment-procedure/
- NON-RECOURSE DEBT: You can use debt in conjunction with your solo 401(k) funds to purchase real estate provided that the debt is nonrecourse financing. For more information please see the following link:
o Non–recourse financing: Find lenders that specialize in non-recourse loans to solo 401k plans: CLICK HERE
- Please keep in mind that you can’t work on the property yourself and if you do a high volume a fix and flips (e.g. more than 2 per year) the IRS may attempt to tax as a business (Unrelated Business Income Tax).
- The property must be purchased from an unrelated person and then sold to an unrelated person.
- Note: you should work with your tax advisor to determine whether this would be deemed a partnership for tax purposes and in this case, a partnership tax return (form 1065) would need to be filed for the LLC and a K-1 would it be issued to each member (i.e. the solo 401(k) and the other person).
- The Solo 401k funds with regards to the income and expense related to the investment must flow in and out of the Solo 401k account (i.e. cannot flow through your personal account).