QUESTIONS: I’m going to purchase real estate in my 401k using trust funds. Then, I plan on borrowing the money on a line of credit to rehab the property. Can I just deposit the borrowed funds in my 401k to pay for the repairs? Is there any special documents I need to complete for the trust to do this?
ANSWERS: When funds are loaned to a solo 401k, the loan is considered a non-recourse loan. Click on solo 401k non-recourse loan to learn more.
While borrowed funds may be incorporated when investing a solo 401k in real estate such as rehab properties, a number of important regulations apply:
First, the non-recourse loan must be to the solo 401k not the solo 401k owner (you in this case).
Second, the solo 401k owner cannot guarantee the loan to to the solo 401k.
Third, the non-recourse loan proceeds must be used towards the purchase of the house (in this case the rehab property); as a result, the non-recourse loan must be obtained prior to purchasing the property.
Fourth, the property that was purchased with the solo 401k and the borrowed funds is the only asset that serves as security for the loan. Therefore, the lender cannot come after any other asset of the solo 401k plan or the solo 401k owner’s personal assets in the event of loan default.
Lastly, the non-recourse loan may be obtained from a hard-money lender as long as it is not the solo 401k owner’s relative (e.g., his spouse, children and parents, to name few) or from a bank. The following banks specialize in loaning funds to solo 401k plans.
The bank providing the non-recourse loan to the solo 401k will provide the required forms for documenting the non-recourse loan to the solo 401k.
Thanks a lot, Tim in Boston Massachusetts