I am considering the formation of a LLC that will purchase a self-storage business and small retail strip mall with monthly rental income.
One of the members of the LLC will be the solo 401k trust, and the trust will provide at least 50% of the down payment for the purchase. However there will be a recourse loan from a bank to fund the deal.
I have 2 questions:
First, is there a prohibition against my using my personal credit and guarantee for a bank loan on a commercial property if the funding for that loan comes (at least in part) from my solo 401k? (Is this considered “self-dealing”?)
Second, what are the ramifications of UBIT if solo 401k funding is used to purchase an established positive cash-flowing business (e.g. self-storage facility)? Would this be different if a separate entity (LLC) ran the business, collected the rents, and simply paid.
1. I presume that (i) the only investor in the LLC will be the solo 401k plan, (ii) the solo 401k owned LLC will not have any W-2 employees, but rather will be setup solely to invest passively in real estate, and (iii) the solo 401k owned LLC will obtain a non-recourse loan. With respect to the loan to the solo 401k owned LLC, the loan cannot be secured by you because you are considered a disqualified party. For a full list of disqualified parties, CLICK HERE.
2. Regarding your UBIT question, I presume that the solo 401k owned LLC will be buying/investing in real estate and the real estate will be rented out. When a solo 401k owned LLC invests in rental real estate—whether commercial, residential or storage—it will be deemed a passive investment not subject to UBIT. Also, neither the solo 401k owner nor disqualified parties may do physical work on the properties, but may perform managerial functions (e.g., collect rent checks, look for tenants, hire contractors to do work on the property) provided neither the solo 401k owner nor disqualified parties get compensated for these managerial functions.