QUESTION: If my self-employed 401k is about 3k short to buy a real-estate property, can I lend it money to buy it? And how should this be structured? As a loan? Thanks.
ANSWER: While the self-employed 401k (Solo 401k) may be invested in real estate, you as the solo 401k owner fall under the disqualified party category, which means that you cannot loan funds to the solo 401k for use in a real estate purchase as it would be deemed a prohibited transaction. Other disqualified parties include your parents, spouse, kids, and your solo 401k provider.
However, the 401k may obtain a loan from a non-disqualified party such as a bank, a hard money lender, the solo 401k owner’s brothers and sisters, the solo 401k owner’s spouse’s parents, the solo 401k owner’s spouse’s grandparents, the solo 401kowner’s stepchildren, the solo 401k owner’s aunts, uncles, and cousins.
When a 401k obtains a loan or debt financing, the loan must be a non-recourse loan, which essentially means that the lender’s only recourse against the 401k in the event of loan default would be the real-estate property for which the loan funds were used to buy the property. Therefore, the lender would not have any recourse against the solo 401k owner or any other asset of the self-employed 401k.
Much appreciated,
Sandy in New York
