Solo 401k Entrust | Solo 401k Vacation Rental | Solo 401k Prohibited Transaction

BACKGROUND: I recently opened an account with a company called Entrust which is a custodian to invest in real estate and other investments. After further research I believe the Solo 401k plan is better for me and my company. The option of being able to take out a Solo 401k loan is once advantage, but there seems to be other advantages.

So I have a question. I am closing on a property in about 3 weeks. The seller owns the property outright and is doing 60 percent financing (approximately). The seller knows Entrust and does understand it will be a non recourse loan. I understand we cannot use the property during the time the Solo 401k plan owns the real estate property. Payments would be made to the seller out of the Solo 401K, and all other operating expenses, electric, gas, management fees, etc. (if I am understanding this correctly). The seller wants out of the property in 3 years. So, we will have a 3 year balloon to pay off the seller, which I am confident we can do with being able to contribute 49,000 per year to the Solo 401k plan.

QUESTION 1: During the time the Solo 401k plan owns the real estate property we understand we cannot use it (it is a vacation rental). But, can I rent it through the rental agent just like any other renter? I am not benefiting from the property, and am in fact renting it just like anyone else and helping pay it off.  
ANSWER: Because the property would be owned by your Solo 401k, you cannot have access to the property, not even for a few days a year. If you used the Solo 401k owned real estate property, it would be deemed a solo 401k prohibited transaction, resulting in payment of taxes on the entire Solo 401k balance and possible penalties. However, once you commence making solo 401k distributions, usually at retirement, the real estate property may be distributed, provided it is first appraised, and taxes paid. Therefore, the solo 401k real estate property would be deeded in your name and owned outside of the Solo 401k plan, allowing you to use the property for personal use.

QUESTION 2: In theory, after we open a solo 401k and 3 years have passed, the solo 401k will own the property outright (paying off the balloon), but we still wouldn’t be allowed to use it as I understand it. Can I sell it to my brother? According to your website in theory I could sell the property to my brother, and then purchase it back from him.

ANSWER:  Because brothers and sisters are not disqualified persons with respect to Solo 401k transactions, the sale of Solo 401k owned real estate to a brother is not prohibited; however, it would be prohibited if the intention of selling the Solo 401k real estate to your brother was to ultimately later sell it to you. This is commonly referred to as straw man transaction and one that the IRS is on high alert.

I have many other questions but will start with these.

Thank you…JD

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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