QUESTION: We are self employed through a partnership and file a schedule k-1 annually to report income from self employment and are looking to open a solo 401k for our partnership and then have the solo 401k buy real estate vacation home (land first then construction loan). If we both wanted to use our solo 401k to do it, we know we personally shouldn’t receive any benefits or funds from it. Have you seen or know of a way we can form a company that has just the two of us as passive management (receiving no compensation) with our Solo 401k plans as the only members?
Regards, Kathy from Massachusetts
ANSWER: Unlike the IRA rules, which are not crystal clear as to whether or not the IRA participant can manage his or her own IRA, the Solo 401k plan rules clearly allow the trustee to manage the assets of the plan including real estate investments. The rule is that the named trustee(s) of the Solo 401k plan cannot perform repairs or use the property, with the exception of office space for the plan. As a matter of fact, our solo 401k plan document has specific language that confirms the trustee can manage the assets of the plan and in some cases receive reasonable compensation for doing so.
What’s more, both solo 401k plans can purchase the property directly under a tenants-in-common transaction. Alternatively, you can form an LLC or C-corporation whereby the solo 401k plans are the only member or shareholders. The real estate purchase would then be made by the LLC or Corporation and thus listed as the owner on the deed, not the Solo 401k plans. Read our real estate solo 401k investment procedure to learn more.